Chart of the Week: Market Implied Probabilities of Changes in US Fed Rate ….

Lagos, Nigeria, Capital Markets in Africa — The market is now significantly more confident of a Federal Reserve hike in interest rates in December, as US payroll numbers released on Friday 6th November 2015 significantly beat analyst expectations. US non-farm payroll jobs grew by 271,000 in October, compared analyst expectations of 150,00-190,000, and well above the 142,000 increase in September.  Whereas the unemployment remained at 5.0 percent and average hourly earnings for non-farm employees rose by 2.5% in the 12 months to October – the biggest gain in over six years.

On Wednesday 4 November 2015, Janet Yellen (the Federal Reserve Chair) testified to the US Congress ahead of the data release and suggested the US economy was performing well, with a rate hike by December was a “live possibility” provided the US economy’s recovery was on track. Yellen, did also mention that if the economy were to deteriorate significantly enough to require further support then “potentially anything, including negative interest rates, would be on the table”.

The market implied probability of a rate hike by the end of the year jumped from 56 percent (on 5th Nov) to 68 percent (on 6th Nov)  following the release of the jobs numbers. The US Dollar also reacted strongly to the news by strengthened against major and African currencies, gaining 2.13 percent against South African Rand and 1.55 percent against Zambian Kwacha on Friday alone.