November NFP: A quite mixed report - Danske Bank

According to analysts from Danske Bank, despite the mixed November US jobs report, the Federal Reserve rate hike seems very likely. They see two rates hikes in 2017 and in 2018. 

Key Quotes: 

“The jobs report for November was quite mixed. Employment grew by 178,000 in November in line with the recent trend and without any major revisions to the previous months. The unemployment rate fell against expectations, from 4.9% to 4.6%, but this was due mainly to a fall in the labour force, so it fell for the wrong reason and we could see it bounce back in coming months. This said, it does not change that the unemployment gap is closing but jobs data are volatile just like other economic data releases.”

“The most disappointing part of the jobs report was average hourly earnings, which fell 0.1% m/m in November – the first fall since December 2015 and the biggest decrease since December 2014. The annual growth rate fell back to 2.5% y/y from 2.8% y/y. While we think the fall was just a fluke, the Fed monitors wage growth closely, as higher wage growth is a key determinant of the number of Fed hikes. 

“Despite the mixed jobs report for November, a Fed hike in December still seems very likely to us.”

“As the FOMC turns more dovish next year due to shifting voting rights, we expect the Fed to offset Trump’s more expansionary fiscal policy only partly despite the output gap being already nearly closed.”

“We expect the Fed to hike twice a year, i.e. a total of five hikes from now until year-end 2018 (including a December hike). As the markets have also bought into the story that Donald Trump will ease fiscal policy to boost growth, we have seen a significant repricing of the Fed. Markets have now priced in a total of four and a half hikes before year-end 2018 compared with two before the election.”