Tips on Employment Indicators; How to Take Advantage of NFP Reports
As always, the main strategy is to find ways to predict what a potentially market-moving number will be before it is released. Because the payrolls figure is such an accurate indicator of economic activity, for instance, economists and traders try to get ahead of the curve by forecasting it. Many keep a journal by their desks, recording events they come across in their daily reading that could influence employment.
Unexpected disruptions like labor strikes, mass layoffs, and natural disasters like hurricanes, tornados, floods, and blizzards can greatly alter the number of workers in a given month. Economists also watch a number of alternative indicators for evidence to support or refute the developments suggested by datain the employment report. One of these alternative indicators is the index of monthly layoff announcements made by companies. The index, compiled by the employment consulting firm Challenger, Gray and Christmas, measures intended dismissals rather than actual firings. It is thus something of a leading indicator. It gives economists an insight into industries that may be experiencing difficulties. Movements in the index are also helpful in gauging the bigger picture contained in the BLS employment report. That is, increases in the number of layoff announcements usually portend a softer payroll picture, while a decline in the number of announced layoffs generally results in stronger payroll growth.
Another resource is the Help-Wanted Advertising Index. Created and maintained by the Conference Board, it tracks the monthly volume of help-wanted advertisements in the top fifty-one newspapers across the nation, thus identifying regional demand for labor. Since the advent of the Internet, however, businesses have had other ways to advertise available positions, so the popularity of the index has faded. Still, it can be helpful in determining general trends in demand for workers.
Probably the most helpful resource for predicting movements in monthly payrolls is the weekly claims for unemployment benefit insurance. Rising jobless claims usually portend a deteriorating labor market. Many economists argue that when the four-week moving average of claims tops 400,000, job creation is stagnant. Of course, the correlation between claims for jobless benefits and the employment data is not precise. Employment conditions can change at any time, and short-lived changes are more likely to show up in the weekly jobless-claims report than in the monthly BLS employment report. Also, although unemployment-insurance benefits generally last only thirteen weeks, bear in mind that people can be out of work for months at a time. Finally, some unemployed workers are not entitled to jobless benefits.
The Non Farm Payrolls release has a big market-impact. It is one of the most important indicators to watch for a trader, as increasing unemployment causes a decrease in personal consumption which has the biggest share in GDP calculations. Usually, if NFP is above the expectations, this will create a positive environment for the US dollar. And if the NFP is below market expectations, the impact will most likely be negative for the dollar. The FIGURE 1 shows the quite negative correlation that NFP reports have with the EUR/USD currency pair (notice the swing highs and lows in both lines moving opposite). I.e., a rising NFP is mostly beneficial to the U.S. dollar.
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