Major averages finished roughly flat in a relatively quiet day on lower volume. The small cap Russell 2000 index has been digesting its gains over the last 3 days after its recent, strong move to new highs, outpacing the other major indices.
Analysts say September's jobs report was affected by Hurricane Harvey and Hurricane Irma. Even so, the reading was appreciably weak as it showed that nonfarm payrolls decreased by -33,000 vs. est +75,000. Average hourly earnings increased by 0.5% vs. est +0.2%.
Despite the weak September Employment Situation Report even when accounting for the two hurricanes, the CME FedWatch Tool puts odds of a rate hike in December at 93.1%, up from Thursday's 77.5%.
This would be the fifth rate hike. We had two hikes in 2016, and another two so far this year. The prime rate stands at 4.25% up from 3.5% a year ago.
Another rate hike pushes the prime rate higher which is the rate that represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers. This can pressure new businesses which are the lifeblood of any healthy economy.
If rates were closer to historical norms, rate hikes would have less impact since going from say 6% to 7% is a smaller proportion compared to going from 3.5% to 4.5%. Bond king Bill Gross has said that while governments and the U.S. Treasury can afford the additional expense brought on by rate hikes, levered corporations and individuals in many cases cannot.
In the U.S. alone, households have $14.9 trillion in debt while businesses owe $13.7 trillion according to the Federal Reserve.So yet another headwind in the form of struggling new businesses may push any meaningful recovery further off.