NEW YORK (CNN/Money) - The bond market's Uncle Alan has told it again and again that a Fed rate hike just isn't going to happen soon. But if the bond market takes a look under the bed, it will find that there really are plenty of monsters down there.
First off, the economy is soaring. The third-quarter's growth rate of 8.2 percent was the best the United States has seen in nearly 20 years. Yes, the nation's key inflation gauge, the consumer price index, remains muted, but commodity prices are surging. The Commodity Research Bureau Index of commodity prices has touched six-year highs; copper, a favorite early indicator among inflation hawks, is up 37 percent this year.
Meantime, the dollar has fallen sharply, sinking to its lowest level in three years against the yen (despite a massive effort by Japanese authorities to keep the buck strong) and its lowest levels ever against the euro.
Now, economists can come up with (and do) with a lot of reasons why we shouldn't worry that the economy's porridge will get too hot. There's plenty of excess manufacturing capacity that hasn't been dealt with. It's doubtful the economy is going to grow much quicker than its natural growth rate (which is higher than it used to be) in the quarters to come. Etc.
But let's apply Ockham's Razor -- the little rule of thumb that tells us to keep it simple -- and ask what's going to happen. Given a period of surging economic growth, rising commodity prices, a dropping dollar, a swelling budget deficit AND super-low interest rates, what would you usually expect the Fed to do?
That's right: start hiking.
The only element that's missing is jobs. Although the employment picture has obviously improved in recent months, the economy still isn't adding enough people to its payrolls to keep the employment rate steady over time -- much less push the unemployment rate down.
Friday's employment report may mark a change, however.
Economists expect it will show that the country added 150,000 jobs in November. It could be even better than that. The Institute for Supply Management reported Monday that its index of manufacturing employment rose to 51 for November, its best level in three years. Anything over 50 indicates expansion in manufacturing employment -- and often has signaled blowout jobs reports.
Most economists don't expect the Fed to raise the funds rate from its current level of 1 percent until the latter half of next year (if they expect a hike at all), and to only raise it grudgingly at that. Fed funds futures, which trade off of rate expectations, indicate a slightly more hawkish Fed, but nothing severe.
Come Friday morning, such perceptions could change quickly. It will be interesting to see how bond traders react.