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The US job report: Not as significant as most think

Today’s ADP report will provide a first insight into Friday’s NonFarm-payrolls. This week’s NFPs, as well as December’s, will be considered of great help to market participants in assessing the odds of a December lift-off by the Federal Reserve. The ADP report is expected to print at 180k in October, slightly below last month’s reading of 200k.
From our standpoint, the market is overestimating the importance of the NFPs when trying to anticipate any monetary policy decision. Indeed, the job market has improved significantly over the last few months, but the Fed has remained side-lined. We believe that inflation levels and the global economic outlook - especially when it impacts directly the US - are of greater influence when trying to predict Yellen’s next move. So where do we stand? The Fed’s favourite inflation gauge, the Core PCE deflator, remained stable at 1.3%y/y in September, below median forecast of 1.4%. When looking at the indicator including the most volatile prices - such as energy and food prices - the picture does look even uglier as prices rose by only 0.2%y/y.
Finally, when we have a look at the “external factors” or the so-called Fed’s third mandate, it is also not supportive of a rate hike in December. First of all, most central banks across the globe are currently easing and are even thinking about increasing the size of their stimulus. The Riksbank increased the size of its QE last week, while the ECB made clear that an extension/increase of bond purchase programme is just a matter of time. Moreover, even if the BoJ continues to present an optimistic view of its economy, the central bank has consistently missed its targets… The Fed is therefore alone against the world. Furthermore, let’s imagine Yellen finally decides to lift rates for some reasons. Higher interest rates in the US mean a stronger dollar, which means lower inflation. And the Fed does not want to have to deal with a disinflationary threat.
A few Fed officials will speak today and we would suggest to focus on those speeches as Fed members’ opinions diverge substantially from one another. Brainard will speak in Frankfurt this morning, Yellen will testify before the House panel and Dudley will speak in New York later today.

Wednesday, 04 Nov, 2015 / 1:28

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