Much of Wall Street’s trading in 2015 has been driven by when the Federal Reserve will institute its first interest rate increase in nearly a decade. Volatility has been elevated as investors’ timetables get elongated or reshuffled in response to weak overseas growth or domestic issues like the drop in third-quarter profits or today’s payroll report, which showed the largest increase since February.
On Wednesday, Fed Chair Janet Yellen seemed to provide a little bit of clarity into the question, while still leaving enough wiggle room to keep investors guessing. In comments to a House Financial Services Committee, Yellen said the Fed expects the economy “will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 percent target over the medium term.” If incoming data supports that thesis, she added, “December would be a live possibility” for a rate increase.
While every payroll report is important for markets, Yellen’s comments make Friday’s October read especially critical for near-term market action and volatility. Investors who are nervous about volatility or the Fed should consider the non-farm payroll report as follows:
If the report is weak--fewer than 162,000 jobs added, which is 10% below the current expectation of 180,000--that would be extremely problematic for the Fed. A number this light would raise concerns about the strength of the labor market, leaving a rate hike virtually off the table. A similar disappointment in the unemployment rate--currently forecast at holding steady at 5.1%--would have the same effect, in our view.
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