With the U.S. retaining its position as the world’s largest economy since 1871, and a nominal GDP forecasted to exceed USD 21 trillion in 2019, the country’s employment status, provided by the Bureau of labour Statistics (BLS), is crucially important.
The Federal Reserve, as well as the investment community, pay close attention to employment figures since household spending in the U.S. accounts for more than two-thirds of the economy’s total output.
The U.S. dollar
The U.S. dollar remains the world’s dominant reserve currency. As of the end of 2018, it made up 61.69 percent of all known central bank foreign exchange reserves.
A reserve currency is one that is accepted for trade throughout the world. Including the dollar, Europe’s single currency and the Japanese yen are also popular reserve currencies.
Not only do most major currency pairs include the dollar, the currency is regularly used as a benchmark. The U.S. Dollar Index is a leading benchmark for the international value of the U.S. dollar, calculated by factoring in the exchange rates of six major world currencies.
In addition to this, the buck is also used as the standard currency in the commodity market, thus having a direct impact on commodity prices.
Breaking down the U.S. Employment Situation Report
The BLS presents its findings at 08.30am EST, generally on the first Friday of the month using two major surveys: the household survey and establishment survey.
Both surveys are required for a complete picture of the labour market.
- The payroll survey (CES) is designed to measure employment, hours, and earnings in the non-farm sector, with industry and geographic detail. The survey is best known for providing a highly reliable gauge of monthly change in non-farm payroll employment. A representative sample of businesses in the U.S. provides the data for the payroll survey.
- The household survey (CPS) is designed to measure the labour force status of the civilian non-institutional population with demographic detail. The national unemployment rate is the best-known statistic produced from the household survey. The survey also provides a measure of employed people, one that includes agricultural workers and the self-employed. A representative sample of U.S. households provides the information for the household survey.
The household survey gathers its data by contacting 60,000 homes concerning employment. The response is usually high. The payroll survey, however, collects its information on the job market from approximately 400,000 businesses. Only 60-70% of the responses make it back in time for the first scheduled release. As more replies filter through, this forms the basis for subsequent revisions. Over the long run, though, both surveys tend to move in tandem.
The economic statistic that generates the most excitement within this report is the monthly change in non-farm employment. Other figures of importance include the unemployment rate, average hourly earnings and participation rate – commonly referred to as labour force participation rate.
- Non-farm Payrolls measures the change in the number of people employed during the previous month, excluding the farming industry.
- The unemployment rate gauges the total percentage of workers that are unemployed and actively seeking employment during the previous month.
- Average hourly earnings is the percentage change businesses pay for labour (this excludes the farming sector).
- The participation rate informs investors what proportion of the work force are employed or ready and able to work.
Trading the release
Amid better-than-expected numbers, the U.S. dollar usually jolts higher. Conversely, a less-than-stellar reading tends to weigh on the greenback, and in the event the release comes in as forecasted, indecisive candlesticks generally print.
However, traders’ reactions to the report can, and often do, diverge. For example, there are times when focus is on wage growth as this is the earliest monthly data released in relation to labour inflation. When businesses pay more for labour (a firm’s biggest expenditure), the higher costs are usually passed on to the consumer.
There’s no ‘right way’ to trade the U.S. employment report as the move is dependent on several themes: market expectations, sentiment and central bank communication about the likely future course of monetary policy, known as forward guidance.
Although some technical traders choose to ignore daily macroeconomic data releases, this can be a chancy approach. Have you ever had a trade form offering a staggering amount of confluence fail in dramatic fashion? You know, the kind of setup that wouldn’t look out of place as wallpaper on your mobile phone. Of course you have. One reason the area may have fell flat could be due to a scheduled news event. Experienced traders are generally conscious of what’s ahead on the economic calendar. Newer traders, on the other hand, often unwittingly expose their positions to potentially damaging volatility around news time.
While you may trade using technical analysis, knowing what news lies ahead is crucial. And in terms of economic indicators, there’s little that comes close to the mighty U.S. employment report.
To conclude, here’s a couple of points to be aware of:
- Leading up to the release is when the market’s uncertainty is at its highest. Traders have no credible data to work with, other than forecasts. As such, executing trades during this time carries additional risk.
- The U.S. ADP non-farm employment change. This data provides an early look at employment growth, and is a precursor to Friday’s BLS non-farm employment change as it’s released two days before.
- Another point is should the release show a higher reading vs. its previous value, but comes in lower than forecasted, the dollar can still make a move to the upside, due to the indicator improving in actual
- Remember the non-farm payrolls report and its associated readings are considered short-term market movers. The currency often reacts immediately, though tends to fade once the excitement diminishes.
Notes:
https://www.focus-economics.com/blog/the-largest-economies-in-the-world
https://www.bls.gov/news.release/empsit.nr0.htm
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