How do US employment statistics affect forex trading?
The CES (Current Employment Statistics) report is generated by employment questionnaires, which are collected from around 145,000 US government agencies and companies. It contains comprehensive, up-to-date labour market information in the form of key indicators, and gives fundamental forex analysts data on employment levels, hours worked and basic payrolls.
The CES report also contains information on: the number of jobs, average hourly earnings and average hours worked, including data on the unemployment rate, broken down by economic sector. Information for the current and previous months is included.
The report is released monthly by the US Bureau of Labor Statistics on the first Friday of the month following the reporting period (usually at 8:30 a.m. New York) and is the second section of the labour market summary.
The first section of this employment summary report presents the results of the CPS (Current Population Survey), i.e. labour market data from a sample survey of households.
It is perceived by the market as a leading indicator of the number of jobs (in non-agricultural sectors), reflecting the dynamics in the industrial, construction and manufacturing sectors of the economy. It does not include data on jobs in the agricultural sector because of the seasonal nature of hiring.
The report includes information on average hourly earnings (known as the percentage change in wages), which is considered by many experts as a leading indicator of consumer price inflation. The average working week (in hours) is also reported in the CES report as a comparative indicator. Seasonally adjusted statistical smoothing (Seasonally Adjusted) is applied to all data.
It is generally assumed that an increase in employment leads to an increase in consumer spending and thus economic growth, therefore an increase in the working week, jobs and hourly wages all have a positive effect on the US dollar. A serious deviation of this data from the forecasts has a sharp speculative impact on the exchange rate, and the rest of the CES report data has very little impact.
The working week indicator allows tracking the start of a general economic downturn. Sharp increases in pay that exceed productivity growth help identify the point at which inflation increases.
Likely impact on:
Interest rates: an indicator value above expectations or a bullish trend is understood as an inflationary factor for the bond market, causing prices to fall and interest rates to possibly rise. Therefore, a weak report is seen as favourable for the bond market.
Equity market: The impact on this market is difficult to assess. Exceeding forecast growth of the indicator signals a high growth rate of the economy, which equates to an increase in potential earnings. However, the indicator may give rise to higher expected inflation, leading to a possible rise in interest rates, which is definitely bad for the stock market.
Forex: Employment growth above the forecasts (all other things being equal) gives the growth of national currency as it indicates the strengthening of the economy and strengthens domestic demand, which again leads to an increase in interest rates. The impact on the Forex market is speculatively strong as it is considered one of the early economic signals of last month's activity and clarification of GDP estimates. The Fed's monetary policy actions depend heavily on this report.
The report has a special place in forex news trading. Traders are advised to keep a close eye on key employment indicators as speculative volatility in major pairs is usually several times higher than average at the time of data release.