The US economy got a huge boost and the Federal Reserve has an interesting dilemma ahead, because the October job report absolutely crushed expectations. The Non-Farm Payroll report that the government releases monthly is not a perfect representation of the job situation in the country, but it’s what’s been utilized for years. It is a key, common barometer that has measured history in order to prognosticate the economic future. It still applies today.
Expectations for jobs were quite cautious heading to November. If you recall, the September job report was a big disappointment. The Fed didn’t raise interest rates in September like we had anticipated all along due to their concerns over international issues. The fear was the global sneezes could get us sick. The Fed didn’t want to take that risk back then. Things have changed now, and for the better.
A whopping 271,000 jobs were created in October, the largest increase for the year. The unemployment rate dipped to a fresh seven-year low of 5%. Expectations were for 183,000, and most people were thinking that number was too high. Boy was that wrong. This was the signal the Fed has been looking for, and allows them to get back on track to discontinue the emergency monetary policies employed since the Financial Crisis. Importantly, the burst of hiring was broad based, and it came despite the slowdown overseas. The US economy remains quite resilient. This bodes well for the holidays, the busiest spending season on the year.
The greatest risk for the Market now in our minds is the US Dollar strengthening again. The strong Dollar puts pressure on US exports as well as foreign countries with Dollar denominated debt. This is particularly a concern for countries that are large commodity producers. They are hurting. But the chance of a December Fed rate hike just got higher. The US Dollar jumped on the job news, taking virtually every currency down against it. The Euro is back down to $1.07, a level not seen since April. The low on the year for the Euro against the Dollar was $1.04. We’re almost there again. The Euro began the year at the high of $1.21.
The US economy led the rest of the world out of recession. It’s no surprise that our Fed will be the first to increase interest rates. This transition will continue to be bumpy. But the economic wounds have been healing since the crisis. One rate hike is more psychological than real. Interest rates will stay low. Stocks and Bonds will be just fine. It’s time for the Fed to just rip off that band-aid. That will be quite healthy.
Have a nice weekend. We’ll be back, dark and early on Monday.