The US Federal Reserve will step back on to centre stage this month with everyone wanting to know whether they’ll hike rates in December.

The market had only given a 35 per cent chance to a December rise but this flipped dramatically to 70 per cent when the latest US employment report was released says George Lucas, managing director Instreet Investment.

The game changing report was strong in all aspects – the unemployment rate, the number of new jobs and a fall in the under-employed rate to less than 10 per cent. Most importantly, there was a strong increase in wage growth – 2.5 per cent – the strongest annual wage growth since mid-2009.

“ Wage growth is a proxy for inflation so the Fed will view this as inflationary pressure and it will give them more comfort to raise rates. Wage growth also means US employees are getting richer.

“If the Fed doesn’t raise rates now and quicker than expected, the increase in wealth will be saved and not spent. And the US needs it to be spent to keep momentum going in the economy.

“Of course, there is still one more employment number due out before the December meeting so it’s not a given that rates will be hiked,” said Lucas.

The response to the latest jobs report from the foreign exchange and fixed income markets was exactly as expected. The US Dollar strengthened against all currencies and bond yields rallied.

The reaction from equity markets, however, was harder to predict.

“Overall, they’ve been pretty quiet which speaks to equity resilience. This is also consistent with the view expressed back in August that the market was much more fearful of the opaque China policy than it was about the Fed. But with fear about China abating, the Fed’s decision will again dominate the market.

“Another thing to keep in mind is that so far this year, the markets have followed seasonal expectations – rally into Feb, sell in May etc. If the trends hold true, we should therefore see the Christmas rally beginning in mid-November.”

As a side note, Canada seems to be benefitting from the stronger USD with a strong employment report showing 44,000 new jobs.

Australian employment stronger than expected

Australia’s employment report is also due out this week. As these reports have tended to be stronger than expected there could be a surprise on the upside for the number of jobs created. That said, the unemployment rate will probably remain relatively constant.

September’s retail sales and international trade figures also support the view that economic conditions have recently strengthened. The 0.4 per cent month-on-month rise in retail sales suggested that sales growth had a fair bit of momentum going into Q4.

More importantly the international trade deficit narrowing to $2.3b from a downwardly-revised $2.7b in August, suggests that net trade may have added around 1 per cent to real GDP growth in Q3.

September quarter GDP growth was expected to be the weakest quarter of 2015 but with net trade now adding significantly to growth, GDP growth could be much stronger than expected.

A final word on China

Whilst we are on the theme of labour markets, the Chinese labour market remains relatively tight despite the slowing economy. We see evidence of this is the strong retail sales numbers and official employment reports.

The strong labour market means there is no pressure on Chinese authorities to rapidly stimulate the economy given it seems to be doing a good enough job on its own.

About Instreet

Instreet is an independent investment house that works closely with the financial adviser community to conceive and distribute retail investment products. After identifying adviser needs and market trends, Instreet builds customised investments sourcing quality wholesale providers. By doing so, Instreet makes institutional assets available to individual investors. The end result is a range of investment solutions designed to better achieve the goals of clients and advisers.

For more information: www.instreet.com.au

Or contact:

George Lucas at Instreet: – 0418 202 228. glucas@instreet.com.au

Simrita Virk at Shed Media: – 043 4531 172. svirk@shedmedia.com.au

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