Improved unemployment raises expectations of December Fed rate lift-off

The eagerly anticipated October U.S. employment situation delivered a clear message to the market. Nonfarm payrolls climbed by 271,000 jobs, the unemployment rate dropped to 5%, and average hourly earnings rose 2.5% over the past year on a 0.4% gain in October. While not cheered by equity markets, this news did raise market expectations that the Federal Reserve will begin the rate hike lift-off at the December meeting, with Bloomberg calculations, based on futures market prices, rising to 70%.

Growth in the U.S. economy appears to be solid, with the good employment data, joined by more rapid growth in the services sector, countering some softer growth in manufacturing activity. October purchasing manager surveys indicated acceleration in the non-manufacturing sector and some moderation in manufacturing, although the rise in the new orders and production surveys may indicate some improvement in November. We believe rising jobs and now rising incomes should provide solid lift to the U.S. economy in the coming quarter.

Markets have been concerned with indications of softer global economic activity for much of the past quarter. October purchasing manager surveys may indicate growth is seeing modest improvement. Indicators for the eurozone and Japan point to improving activity. Data for China continue to point to contraction, but a rebound in the surveys seems to indicate activity may be turning to stability and perhaps growth.

Stimulus remains a key in all three economies, with Europe and Japan both engaged in quantitative easing (QE) plans, which are likely to expand. China has cut interest rates in an effort to stabilize the manufacturing sector and support economic growth. While growth is unlikely to accelerate in most global economies, easy monetary policies should stabilize growth at modest levels.



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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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