NFP Report Good Enough for December Fed Rate Hike

The U.S. economy added 178,000 jobs last month, average hourly earnings declined 0.1% and the unemployment rate fell to 4.6%, according to a widely anticipated report Friday from the U.S. Labor Department.

The report, which is the last major labor market report before the U.S. Federal Open Market Committee’s policy meeting on December 13 -14, came in fairly close to pre-report guesses at 175,000.

Average hourly earnings came in below the 0.2% estimate. The big surprise was the drop in the unemployment rate from 4.9% to 4.6%.

The report is seen as a positive and when combined with the stronger dollar and upward revisions in GDP should lead to a Fed rate hike in December.

While the headline rate came in as expected, the unemployment rate was the surprise development. Its decline to 4.6% came in well below the 4.9% estimate, hitting its lowest level since August 2007. The move in the unemployment rate was due in part to a decline in the labor force participation rate to its lowest level since June and still near 40-year lows.

The report went on to further show that a broader measure of joblessness that accounts for the underemployed and discouraged workers also fell, declining from 9.5 percent in October to 9.3 percent in November, the lowest since April 2008. However, the number of workers counted not in the labor force surged by 446,000 to 95.06 million.

After the report, Fed Funds traders assigned about a 93 percent chance that the Fed would raise rates a quarter-point at its December meeting.

Forex

The U.S. Dollar fell on Friday against most major currencies and is in a position to close lower for the first time in four weeks. The mixed U.S. jobs data, particularly the lower average hourly earnings, casts doubt on the number of potential rate hikes by the Fed next year. Investors now believe the Fed will continue its slow, steady course with one possibly, two hikes next year.

The EUR/USD was down with traders looking ahead to the Italian referendum over the weekend. Sunday’s referendum could reject constitutional reforms supported by Prime Minister Matteo Renzi. With his political future at stake, Renzi’s departure could destabilize Italy’s unstable banking system and be taken as another attempt to unseat the establishment, possibly shaking up investor confidence in the Euro Zone currency.

Gold

December Comex Gold futures inched higher on Friday, mostly due to the weaker U.S. Dollar and the mixed U.S. equity markets. Gold traders had very little reaction to the U.S. jobs report, acting as if the interest rate hike by the Fed had already been priced into the market.

Crude Oil

January WTI Crude Oil futures traded steady to better on Friday as many of the aggressive buyers earlier in the week took a break after prices spiked higher in reaction to OPEC’s decision to cut output. Prices actually declined early in the session, but were underpinned when the dollar weakened after the release of the U.S. Non-Farm Payrolls report.