Strong ADP Jobs Report and Hawkish Fed Comments Reinforce Likelihood of December Rate Hike

Equities are trading moderately lower while Treasury yields and swap rates are higher across the curve off the back of stronger-than-expected US jobs data.  The ADP’s private payrolls report showed companies added 217,000 workers in November following an upwardly revised 196,000 gain in October.  The headline number is the largest since June and handily exceeded the 190,000 analysts were expecting.  The report underscores the health of the US labor market and is likely to ratchet up expectations for Friday’s nonfarm payrolls report.  The dollar is rallying against most major currencies on increased prospects of a rate hike while WTI crude is back down to $40/barrel.

Central bank speakers remain a prevalent theme this week.  Atlanta Fed President Lockhart said this morning that “the case for liftoff is compelling”.  This isn’t a groundbreaking view, but he’s a voter in 2015 and widely viewed as a centrist, so his comments hold merit.  Lockhart reiterated that the path of subsequent hikes is likely to be “rather gradual”, which echoes last night’s comments from Fed Governor Brainard.  Brainard went so far as to describe the future of short-term interest rates as a “new normal”, stating that rates may peak at a lower level than previous expansions.  Meanwhile, Yellen just finished her speech to the Economic Club of Washington and has said she is “looking forward” to liftoff as it would be a testament to how far the economy has come since the depths of the recession.  She also acknowledged the risks that could arise from waiting too long to begin the start of policy normalization. The market still has comments from the Fed’s Tarullo (moderate, voter) and Williams (hawk, voter ’15) to digest in addition to corporate supply from McDonalds.

Despite the somewhat more muted move in longer term bond yields, money market rates continue to move up in anticipation the first Fed move.  LIBOR rates from 1 to 12 months have all hit their highest levels in over 3 years today.  1 month LIBOR being set above 0.25% and up 6 basis points over the last month, while 12 month LIBOR set at just under 0.99%, up 15 basis points in the last month.