The release of data on the US labor market leads to sharp movements of currency pairs on Forex
For two decades, during which I have been monitoring financial markets, the report on American employment has regularly been one of the key events of the week. On the one hand, it looks logical, because investors are closely watching the Fed, and the central bank has a double mandate. His tasks include both inflation control and unemployment control. On the other hand, the reaction of markets to employment significantly exceeds their sensitivity to inflation and is comparable to the reaction to the publication of FOMC meeting minutes or at a press conference with Fed chairmen. What is the matter? Are investors putting unemployment higher than inflation?
The fish is looking for a place deeper. We will gladly exchange work for a higher paying one, investors will carry money to where you can earn more. Where higher interest rates. Their value depends on the actions of the central bank, so it is understandable why speculators carefully monitor the monetary policy of the Fed. Its tightening helps strengthen the dollar and vice versa. Task number 1 – to understand the motives of the regulator. At first glance, this is not difficult. The higher inflation will climb, the more likely it is to see higher than currently the federal funds rate, US Treasury bond yields, and the USD index. The problem is whether the Fed sees the acceleration of consumer prices as a temporary phenomenon or trend. In the first case, it will tolerate inflation above the target of 2%, in the second it will turn a blind eye to criticism of the president and will continue to normalize monetary policy.
The labor market report helps answer the burning question. According to the Phillips curve, the lower unemployment falls, the higher consumer prices are at risk. The logic is simple: if the economy has more employees, their total income grows, which allows us to count on an increase in costs and an increase in prices.
Reality is often different from theory. If in the 1990s and 2000s, the decline in unemployment was accompanied by accelerated inflation and vice versa, then in the 2010s the situation changed radically. The reasons should be sought in the use of new technologies that allow employers to save on wages, in the process of retiring the generation of baby boomers (those who come to the place of old employees are usually paid less), as well as in the distortion of financial markets under the influence of the Fed’s quantitative easing programs.
The task of forecasting inflation using the analysis of labor market conditions has become much more complicated. As a result, the Phillips curve comes under fire, but it still continues to work. And if the Fed forecast for 3.5% of the unemployment rate in 2019 is realized, then the CPI and the federal funds rate will continue to rally. Another thing is whether it can provide support to the dollar? A hint will be made … by a report on American employment! The dynamics of non-farm payrolls clearly tracks economic cycles. Slowing the indicator signals the approach of a recession, its departure to the red zone – of a recession.
Thus, a steady increase in employment outside the agricultural sector amid a further decline in unemployment is a strong argument in favor of continuing the normalization of the Fed’s monetary policy, which should be considered as a “bullish” factor for the US dollar. Another thing is if non-farm payrolls start to slow down, which will be evidence of the imminent completion of the economic cycle. And in such circumstances, the “American” should be sold.