Fed funds futures are pricing in an 80% chance of a 75 bps rate cut by year-end following the sharpest drop in U.S. nonfarm payrolls since December 1974.
The implied probability has climbed steadily from no chance to 64% a day ago. However, markets remain fully priced in for a minimum 50 bps rate cut by the FOMC meeting set for Dec.16.
U.S. nonfarm payrolls plummeted way beyond the consensus expectation with 533,000 jobs lost in November, marking the 11th straight month of declines, the Bureau of Labor Statistics reported. Nonfarm payrolls were expected to fall by 335k jobs in the month.
The unemployment rate soared two-tenths to 6.7% (6.682%), the highest level since October 1993, yet this figure is actually below the consensus call for 6.8%. Over the past year, the unemployment rate has soared by 1.7%.
Millan Mulraine, economics strategist at TD, expects the Fed to step in with a rate cut as deterioration in the labour market intensifies.
"As a result, we expect the Fed to continue easing monetary policy with a further 50 bps cut in the fed funds rate when the FOMC meets later this month, with a non-trivial chance of a more dramatic cut in the policy rate," Mulraine wrote.
Economists at RDQ project that the weak report will translate into a drop in real GDP of 5% year-over-year.
"These data will spur the calls for a massive stimulus plan, increase the chances of a rescue package for the domestic auto industry, and add to the case that the Fed cuts the fed funds target rate by another 50 basis points in December," they wrote in research note.
All Data taken at 2:35 pm EST
By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2008