By: Jeff Branstad, CFA, Investment Product Management November 30, 2015
Investors have discussed and debated the Federal Reserve’s rate hike plans throughout 2015 with the volume rising even louder in November. A strong jobs report and an upward revision to third quarter U.S. GDP data helped build the case for a rate hike before the end of the year.
By the Numbers
Market activity in November, as reflected in the most common market indexes we follow.
December lift-off looks more likely
An unexpectedly strong jobs report announced early in the month convinced many market watchers that the Fed will finally begin to raise the Fed Funds Rate in December. The jobs report showed that 271,000 jobs were added in October, substantially higher than the expected rate of 183,000 new jobs. That was the largest new jobs number of 2015. At the same time, earlier jobs reports were also revised upward. The unemployment rate fell to 5.0%, the lowest it has been at since April 2008. Not all parts of the unemployment picture are as rosy as the top-line number – broader measures that include people no longer looking for work and those that are working part-time but want to work full-time are still higher than usually seen at this stage of an economic expansion. Wage growth has been slow to materialize as well, but the latest report saw average hourly earnings jump by 2.5% from a year earlier. The participation rate is still well below pre-recession levels, too, partly due to the increasing number of retiring baby-boomers, but also because many discouraged workers have given up looking for jobs. Still, it’s hard to deny that employment factors are decidedly stronger now than they have been at any other time since the recession.
The case for raising rates in December got another boost from an upward revision to third quarter U.S. GDP growth rates. The economy expanded at a faster pace than initial estimates suggested, advancing at a 2.1% rate instead of the 1.5% estimated growth rate first reported. An improved reading on inventory investment was largely responsible for the increase. However, corporate profits took a step back, falling by 3.2% since the previous quarter.
At the beginning of the month, the Fed Fund futures market was almost evenly split on whether or not a rate hike would occur before the end of the year. However, after the strong jobs report and improved GDP data, the futures market was projecting a nearly 80% chance of a rate hike in December. The Fed meets on December 16, so the release of their statement after that meeting could finally help the bond market enter a new chapter. A potential benefit of the long lead time associated with this decision is that investors have had a lot of time to prepare, which could potentially help bond prices better absorb the impact of higher rates.
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