Rate Watch Redux

The guessing game is on again.

The October Employment Situation report that came out last Friday has left economists grasping for superlatives. The numbers were way above what analysts were looking for–somewhere around 190,000 new jobs. Instead non-farm payrolls grew by 271,000, the largest increase since last December.

Even better, all but 3,000 jobs were in the private sector with nearly every category posting solid numbers. Professional and business services were on top with 78,000 jobs, but construction, retail (with the holidays in mind) and trade and transportation all got their share. The 25,000 temp hires indicate additional permanent positions are in the offing. Manufacturing didn’t add jobs–analysts had expected a decrease–but both hours worked and overtime were up.

Finally, unemployment dropped another notch to an even 5%, the lowest rate since April 2008. Economists generally consider this full employment.

Earlier jobs reports had met the Federal Open Market Committee’s (FOMC) target for raising interest rates but the soft September data prompted some hesitancy. The new figures put a checkmark on employment then underlined, bold-faced and sprinkled glitter on it. Of course the November report–due out a week before the December FOMC meeting–could reverse course and there we would go again.

The 2% inflation goal remains on FOMC’s “honey-do” list but the report may scratch that off as well. Wages in October grew at their fastest pace since mid-2009. Hourly earnings were up 0.4% from September and 2.5% year-over-year.

Rates futures immediately moved from predicting a 58% chance of a December increase to 70% and Curt Long, an economist with the National Association of Federal Credit Unions, pretty much summed up the prevailing sentiment. He told the Wall Street Journal, “Barring catastrophe, everything looks set for the Fed to raise rates in December.”

But why wait? A U.S. Treasury bill action on Monday brought the highest yields on short term notes in years. The three month T-bill sold at a discount rate of 0.135, up from 0.11 and its highest rate since early 2011. The six-month bill hit a six-year high. Freddie Mac also posted an 11 basis point increase this week in the 30-year fixed rate.

Respondents to Fannie Mae’s monthly National Housing Survey in September sent the “yeah, it’s a good time to sell” response number to a record high but in October they changed their mind, sending it plummeting 6 percentage points. The positive response to whether it was a good time to buy also fell by 2 points. Fannie Mae called consumer sentiment “volatile” amid concerns over rising rates and stagnant incomes. Maybe they should just say “confused.”