Examining reasons for popularity of US employment reports

Reports on the US labour market lead to sharp movements of currency pairs on Forex

I’ve been analysing financial markets for over 20 years and the US employment reports have normally been the key event of the week during this whole period. On the one hand, it looks logical as the investors follow closely the FED’s actions while the Central Bank has a double power.  Its task is both inflation regulation and unemployment control. On the other hand, the markets’ reaction to employment statistics is much more significant than the one to inflation and is comparable to the reaction to the publication of FOMC’s minutes or to FED chairmen’s press conferences. So, what’s the matter? Do the investors really think unemployment is weightier than inflation?

Fish try to find a deeper place. You and I would gladly change jobs for better paid ones. Investors will bring their money where they can earn more. Where interest rates are higher. Their size depends on the central bank’s actions, so it’s quite understandable why speculators follow the FED’s monetary policies so attentively. Tougher policies consolidate the dollar, and vice versa. Task №1 is to understand the regulator’s motives. At first sight, it doesn’t seem difficult. The higher the inflation is, the higher the federal funds rate,  the US treasury bond yields and USD index may be. The task is to understand if the FED considers growth in consumer prices as a temporary phenomenon or a trend. In the first case, it will tolerate inflation above the target of 2%, in the second case it will turn a blind eye to the president’s critics and will go on normalizing the monetary policy. 

The labour market reports help answer this burning question. According to the Phillips curve, consumer prices tend to soar in case of lower unemployment rates.  The logic is simple: with bigger employment figures, the population’s aggregate income rises and allows counting on expenses and prices growth. 

The Phillips curve

Source: Wikipedia.

Reality is often different from theory.  If a decrease in unemployment in the years 1990-2000 was followed by an inflationary acceleration, and vice versa, the situation changed radically in the 2010s.  The reasons should be searched for in new technologies that allow employers to save money on wages, in the process of the baby-boom generation’s retirement (new employees are paid less, as a rule), and in the misrepresentation of financial markets due to the FED’s quantitative easing programs.  

US unemployment and inflation dynamics

Source: Trading Economics.

The task of forecasting inflation through the analysis of the labour market state is much more difficult now. As a result, the Phillips curve is severely criticized, but it still works. If the Fed’s unemployment forecast of 3.5% in 2019 is realized, the CPI and the federal funds rate will continue rising. Will it support the dollar? It’s another question. And the US employment report will give us a hint! The non-farm payrolls dynamics traces economic cycles quite accurately. The indicator’s slowdown points to an approaching recession, entering the red zone indicates a recession.  

US employment and GDP dynamics

Source: Trading Economics.

Thus, a stable increase in non-farm payrolls amid a subsequent decline in unemployment is a weighty argument for continuing normalization of the monetary policy by the FED, which should be considered as a bullish factor for the US dollar. If non-farm payrolls start to slow down, a forthcoming end of the economic cycle should be expected. In such conditions, we’d better sell the greenback. 

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Price chart of EURUSD in real time mode

The labour market will show Forex its way

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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