The monthly U.S. jobs report for November that will be released on Friday is unlikely to be so bad that the Federal Open Market Committee would upset market expectations and refrain from hiking interest rates in mid-December. Instead, the data are likely to validate what fixed-income markets have already priced in when it comes to short-term interest rates.
The report, however, could contain insights that help shed light on the subsequent path of policy interest rates.
Since the FOMC last met in early November, the balance of risks to the U.S. economy has shifted to the upside, for both growth and inflation. This has been accompanied by signs of further strength in the labor market, which is getting a lot closer to “full employment,” and from stock markets that are trading at (or very close to) record highs. In addition, the economic and financial headwinds from abroad have significantly abated.
It is not surprising then that markets have taken the probability of a December rate hike to a virtual certainty, despite the cloud associated with the Dec. 4 Italian referendum. Indeed, short of a huge European dislocation, the November employment snapshot would have to be truly awful to dissuade the Fed from hiking for the second time in 10 years.
By "awful" I mean some combination of low monthly job creation (50,000 or less), large downward revisions to the employment data of previous months, a deceleration in annual wage growth to below 2 percent, and a participation rate that, by increasing by 0.3 percentage points or more, signals significant remaining slack in the labor market.
That combination is very unlikely, particularly given the information about the economy from other recently released indicators, including this week's data on consumer sentiment, third-quarter gross domestic product, the Chicago Purchasing Managers' Index and the ADP numbers). What's much more likely is a jobs report that validates strong and widespread expectations that the Fed will move on rates in a couple of weeks.
This does not mean, however, that the monthly jobs report has lost its ability to influence policy and market prices. Although the timing of the next rate hike holds little mystery, what comes after remains uncertain.
Despite the recent widening in yields, markets continue to expect a path of higher rates that is slower than the pace implied by the Fed's “blue dots,” which represent the expectations of individual members of the Open Market Committee. Whether convergence occurs (as well as when and at what level) will be determined by inflationary expectations. And these will be heavily influenced by the tightness of the labor market, particularly when it comes to wage growth.
At least for now, some of the anticipation and excitement has been taken away from the highly watched data release on the first Friday of the month. Don’t let that fool you. The employment report remains an important input for assessing the future of monetary policy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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