Dear Janet: The Market Says it’s Time to Work Your Magic

The highly anticipated U.S. jobs report did little to hurt traders’ confidence that the Federal Reserve will raise interest rates this year. After a week of steady economic data, the futures market on Friday was pricing in a 65.9% chance of a rate hike in December. A move at the Fed’s meeting in November is widely considered to be off the table due to its proximity to the presidential election. 

Employers added 156,000 jobs during the month of September, and the U.S. has now added an average of 178,000 jobs per month this year. While lower than the 229,000 monthly average seen in 2015, this level of job creation is still healthy given the longevity of the recovery and the overall level of unemployment. In addition, the participation rate increased a tenth of a percent to 62.9% in September, which explains the slight uptick in the unemployment rate to 5%. 

Aside from employment, other economic data last week also came in on the positive side. Manufacturing in the U.S. returned to expansionary territory in the month of September with the Institute for Supply Management’s (ISM) index advancing to 51.5 from August’s reading of 49.4. The ISM services index also handily beat expectations of a 53 print, coming in at 57.1. A reading above 50 in the ISM indices indicates economic expansion. 

With the increasing likelihood of a rate hike this year, it’s worth reminding ourselves that the Fed only controls the front end of the curve, and that the direction and level of longer-term interest rates will ultimately be dictated by economic growth and inflation. Our clients’ portfolios are structured to take advantage of higher interest rates should they come to fruition, with an allocation to bonds on the front end of the curve that can be thought of as “dry powder” and used to reinvest at higher yields.

Source: The New York Times, Bloomberg