Macro Commentary

Once again, expectations climb for the Fed to act.  This morning’s job report in the US showed an increase of 271k jobs – well exceeding the consensus estimate of 185k.  Job gains were broad based across industries.  Wages to were up 2.5% and the unemployment rate fell to 5%.  All together this strong report caused the market to increase the likelihood that savers get a little more interest on their deposits in December to almost 70%.  Equity prices weakened a bit (though they are still on pace for the sixth straight weekly gain) and the US dollar strengthened.  Interestingly, longer term US rates also increased 0.08% with the 10 year US Treasury maturity rising to 2.33%.  Does this signal that the market believes that an increase in the Fed funds rate will not affect the US economic trajectory?  Still, it is only a day’s expectation.  We have seen this picture show before with expectations waning as the meeting approaches.

The Bank of England (BoE) also met this week deciding to leave their interest rate at 0.5%.  Relative to the rest of the world excluding the US Federal Reserve, the BoE is the next closest to tightening policy.  With relatively strong GDP and improving labor market, the UK has recovered well.  However, the communication from the November meeting suggested that the stance is softening a bit.  Along with a reduction in their inflation forecast in 2016 to 1.1%, the policy makers changed their language to say that they expect the time it will take for inflation to reach back to the 2% level to be “around” 2 years instead of “within.”  In addition, the forecast for 2016 GDP was revised lower at the margin to 2.5% – not a dissimilar trend in projections by other national central banks.  While Fed action to raise interest rates will cause the US dollar to rise relative to major trading partners thereby easing financial conditions at the margin, policy makers both fiscal and monetary will need to shore up their own economic situation.

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