UPDATE 1-U.S. rates futures fall after strong payrolls data

Fri Nov 8, 2013 10:08am EST

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By Richard Leong

NEW YORK Nov 8 (Reuters) - U.S. short-term interest rates futures fell on Friday after data showed surprisingly strong U.S. jobs growth in October, reinforcing expectations the Federal Reserve would raise its policy rate by the middle of 2015.

The unexpectedly large increase in hiring last month stunned many economists and investors who had expected a meager figure due to the a 16-day government shutdown that furloughed hundreds of thousands of federal workers and contractors.

The Labor Department said U.S. employers added 204,000 workers in October, far more than the median forecast of 125,000 among economists polled by Reuters. The September figure was upgraded to 163,000 from the originally reported 148,000.

"The rates market was pricing in a lot less rate hikes before the data," said Jim Lee, head of short-term markets and futures strategy at RBS Securities in Stamford, Connecticut.

The April 2015 federal funds contract fell 3.0 basis points to 99.725, while the June 2015 contract declined 3.5 basis points to 99.655.

These levels implied traders expect a 47 percent chance the U.S. central bank will hike rates in April 2015 and a 55 percent chance of a rate hike in June 2015, according to CME Group's FedWatch program which calculates traders' expectations on the changes to Fed's policy rate.

On Thursday, the April 2015 fed funds contract suggested a 43 percent chance of a rate hike and the June 2015 contract a 51 percent chance.

The latest jobs figure, while it shored up expectations of a Fed rate hike in mid-2015, caused traders to speculate whether the Fed might pare its current $85 billion monthly bond purchases at its December meeting, analysts said.

Prior to October payroll data, most economists reckoned the central bank would not consider tapering its third round of quantitative easing until March 2014 at the earliest.

"It's refueling the idea the Fed might taper in December," Lee said.

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