Traders now treat a December Fed rate hike as the likely outcome. On Friday, November 6, CME FedWatch put the probability of a quarter-point (25-basis-point) December hike at 76.8%. A week earlier, it was 66.9%. The jump came after October employment rose by 165,000, exceeding LSEG’s consensus.
That number is a market-implied probability drawn from futures pricing, and the Fed has given no guidance about December. A hike would lift the federal funds target range from 3.75%-4.00% to 4.00%-4.25%.
The State Street SPDR S&P 500 ETF Trust (NYSEARCA:SPY) rose 0.32%, while the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) barely moved. That was a quiet reaction to a sharp shift in rate expectations.
Fed Officials Were Already Leaning Toward Another HikeMeasured within the day, the probability of a December hike rose from 70% earlier Friday to 78% after the data came out. That is a separate measure from FedWatch’s week-over-week comparison.
The Fed hiked on September 16 by a 12-0 vote. It then held on October 28 by a 10-2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack disagreeing because they wanted another hike.
San Francisco Fed President Mary Daly said Friday that the Fed will likely have to tighten further to bring down inflation that is still too high. She gave no timing or size and said she prefers a deliberate, gradual approach. She also called the revaluation of technology stocks painful but measured.
Employment Ran Far Ahead of the ForecastThe October gain compares with an average monthly gain of 48,000 over the prior 12 months, and it came in at about 2.5 times the consensus forecast. Revisions raised August to +186,000 and September to +60,000, adding 84,000 jobs combined.
Broad hiring supports a hike: professional and business services added 70,000 jobs, health care 42,000, transportation and warehousing 25,000, manufacturing 19,000.
Wages matter most to a Fed focused on inflation because pay gains feed into service prices. Average hourly earnings rose 0.4% to $38.00, up 3.1% from a year earlier.
Unemployment was little changed at 4.1%, inside the 4.1% to 4.3% range it has held since March. The weak spot was part-time work for economic reasons, which rose by 339,000 to 4.8 million people.
Short-Term Yields Moved While Long Bonds Held SteadyThe two-year Treasury yield rose to 4.51% from 4.46%, a bigger move than the ten-year’s rise to 4.86% from 4.84%. That pattern shows traders revised their view of the near-term path of Fed policy. The dollar index gained 0.7% shortly after the release.
Stocks rebounded after Thursday’s AI and chip selloff, which pushed the S&P 500 down 4.36%. The index rose 0.31% on Friday to close at 7,376.86 but still fell 2.68% for the week ended November 6.
SPY reached $742.21 during the day before giving back much of its gain. TLT slid just 0.01% to $81.92.
Inflation Data and Jobs Report Will Set Up the December Fed MeetingOctober consumer price index (CPI) data arrives on Tuesday, November 10, at 8:30 a.m. ET, and the November jobs report follows on Friday, December 4. Those are the last major data points before the Federal Open Market Committee meets December 8-9.
Higher policy rates reduce what future earnings are worth in today’s dollars, and SPY is heavily weighted toward the technology stocks that led Thursday’s decline. That leaves SPY exposed to further pressure if the Fed hikes at the December meeting.
TLT offers little protection, because long-duration bonds lose the most value if hikes continue. Short-duration Treasury yields tend to rise along with each Fed hike, which limits price risk at the front of the curve.
This view weakens if October CPI comes in cool and SPY closes back above $742.21. If CPI runs hot and FedWatch’s December odds climb past 77%, pressure on SPY will likely build.