The following article was written by FXTM Research Analyst Lukman Otunuga.
On the first Friday of every month, circa 1.30pm GMT, the US Bureau of Labor Statistics issues its monthly Employment Situation Summary – more widely known as the Jobs Report. The report not only estimates the number of employed and unemployed citizens, but also covers details such as the amount of hours being worked, the average hourly earnings and a myriad of other related statistics.
Many interpret the Jobs Report as an
indication of the health of the US economy. Its publication is widely anticipated by economists, large corporations and financial institutions alike – but what of the influence on eager investors? FXTM Research Analyst Lukman Otunuga explores how the report might impact the markets, and why an experienced trader would take note and mark the date.
The Job Report itself provides a breakdown of the employment situation across different age, sex and race groups throughout the region in as much detail as is feasibly possible to acquire. The number of new jobs created on a monthly basis is a vital indicator of economic growth, which is of course an extremely significant contributor to the health of the financial markets. Private industries in the United States have generated a vast number of new roles over the past years. The US Bureau of Labor Statistics (BLS) reveal that there are almost 127 million employed persons as of August 2018 – an increase of more than 17 million compared to the figure of less than 110 million in January 2010.
The US workforce is defined as people who are physically and legally able to work – and does not include those in the military or in the criminal correction system. The unemployment rate is calculated by a survey of sixty thousand households. This figure is closely monitored by the Federal Reserve, as the higher the percentage of employed persons, the greater the risk of inflation due to the fact that businesses begin to spend more on skilled workers – and the workers themselves demand higher wages.
This places a trader’s investments at risk, as purchasing power declines and the value of investment returns is reduced.
Another crucial aspect of the report is the analysis of employment by sector. Struggling or diminishing sectors will either fail to add more jobs or actually reduce existing roles. This is a sign of economic distress, as the companies in question cannot afford to add to their talent pool – or even maintain it at its current level. Likewise, a sector that is increasing the number of jobs available is most likely on the cusp of further economic growth. This is another valuable indicator for traders, as it may point them towards the direction of a profitable investment.
The most recent BLS report for October 2018 surpassed predictions and the markets responded accordingly. Employment growth continued to follow the positive trend of the past eight years, with 250,000 jobs added in that month alone. Wages also grew by 3.1%, as did average hourly earnings – which is the highest level they reached since 2009’s financial crisis. The sectors that reported the highest number of new jobs included healthcare, transportation, manufacturing and warehousing.
Once the report was released, the US Dollar rose by 20-30 pips against the major currencies. The Dow Jones Industrial Average appeared poised to open higher, while low earnings from tech conglomerate Apple resulted in the NASDAQ’s pointing towards a flat open. Meanwhile, the yield on 10-year treasury bonds hit 3.18% and the US stock index futures fell lower.
The resulting market bounce provided traders with potential opportunities for profit, assuming that risk-management strategies and a moderate stop were implemented. The published statistics also signal possible investment prospects for months to come. The reported high wage growth resulted in the Federal Reserve hiking interest rates – while the central bank is forecast to increase interest rates in December, and possibly three times next year.
However, it is imperative for traders to take other factors into consideration prior to using these statistics as grounds for any investment decisions. October’s hurricanes in the US may well have distorted the data, considering potential employee absences due to transportation issues or related emergencies at home. Another anomaly amongst the report concerns manufacturing. Whilst the Institute for Supply Management reported that it’s manufacturing index was at a six-month low, the BLS statistics reported an addition of 32,000 jobs to this sector.
In closing, rising employment does indeed provide clues to the economy’s condition and corporate earnings, as well as insights into currency prices and interest rates. However, the US Monthly Jobs Report is subject to major revisions well after its publication so it could be considered a volatile source.
It is also vital to remember that the span of a month is a short amount of time; it’s the underlying trend that should be followed, observed and acted upon with caution.
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