Market Ramifications From Economic Releases

The following has been constructed to meticulously interpret how the employment situation report released February 3, 2017, impacted the financial markets in the United States. The Employment situation is a powerful economic release that heralds information pertaining to the unemployment rate, number of payroll employment added, participation rate, average hourly earnings, and average workweek hours. This report will address the ISM manufacturing index and summarize how said releases came out versus expected, what it means for the general economic climate, and what it means for each specific financial market.

Employment report

The employment situation report is released monthly by the Bureau of Labor Statistics (BLS). The employment report is released on the first Friday of every month and it is an economic release highly anticipated by investors all over the nation. According to Bloomberg. com:“The employment situation is the primary monthly indicator of aggregate economic activity because it encompasses all major sectors of the economy. It not only reveals information about the labor market, but about income and production as well. ”As a result, this monthly report has an astounding influence on investors’ perception on the trajectory of the economy and thus an influence on financial markets. In order to begin analyzing the market’s reactions, one must first break down the report’s nomenclature and interpret their implications. According to Bloomberg. com, number Nonfarm Payrolls added for the month of January was 156,000 which was later revised and changed to an approximate 157,000. The consensus for the number of Nonfarm payrolls to be added in February was 175,000 jobs; between the ranges within 155,000 to 195,000. The employment situation reported an actual incredible number of 227,000 Nonfarm payrolls added.

The Unemployment rate, which measures the rate of unemployment of Americans whom are actively seeking for jobs, was reported at 4. 7% last month. The overall consensus range prediction for the month of February was within 4. 6 to 4. 7 percent and the actual reported rate was 4. 8%. Although it was 10 basis points higher, it is still a favorable rate of unemployment compared to the past decade. Below is a graphical representation of the unemployment rate within the past decade according to the BLS. The third sub-category is the number of Private payrolls which differs from nonfarm payroll with private household, nonprofit, and farm jobs. With that being said, private payroll jobs added are typically lower than nonfarm payroll due to their specialized nature. The number of private payroll jobs added in January was 144,000 which was later revised to 165,000. The predicted consensus for this month was 180,000 with a range within 160, 000 to 188,000. The actual reported number was 237,000 private jobs added. The number of jobs was an amazing 64. 6% increase from January’s reported number. The participation rate slightly increased from 62. 7% to 62. 9% which can be perhaps attributed to baby boomers retiring and younger people actively looking for work. This postulate could even describe why it is that Average hourly Earnings declined from a previous rate of 0. 4% to 0. 1%, one month into the New Year. However, the Average Work Week slightly increased from 34. 3 of last month to miniscule 34. 4 which was accurate in comparison to the consensus range (34. 3 to 34. 4 hours).

Market ramifications

The “market” and its financial nuances, are often gauged in comparison to the S&P 500 index. According to Investopedia. com, a reputable source for investors and finance professionals, states:“The Standard & Poor's 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U. S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. ”With that being said, mathematical fluctuations within this index are largely considered a close representation of how investors in financial markets react as a whole. Therefore, we will study how the employment situation report impacted the S&P 500 and deduce qualitative implications of the relationship between the report and the market. The employment report for February 3, 2017 certainly exceeded expectations in comparison to prior, expected, and actual numbers. With the exception of Average Hourly Earnings and a slight rise in unemployment, most categories of the employment situation reported optimistic values.

Consequently, the markets reacted positively. Below is a graphical representation of how the S&P 500 reacted to the employment report today:The S&P 500’s adjusted close on February 2nd was 2,280. 85 and opened February 3rd at 2,288. 54. Throughout the day, the S&P 500 had a high of 2,298. 31 and a day low of 2,287. 88. As seen by the graph above, the market immediately shot up shortly after the employment report was released. Although the market fluctuated throughout the day, the S&P 500 rose by 16. 77 points which was a. 73% increase at an adjusted close of 2,297. 42. Given this information, it is truly amazing to see the immediate and drastic response reflected in the market shortly after the release of the employment report. I believe investors were truly excited to see such a large number of nonfarm and private payrolls added. This can be construed as an indicator of a growing and prosperous economy. Another indicator of U. S stock performance is the Dow Jones Industrial Average (DIJA). To truly solidify the claim of the report affecting the stock market, the DIJA went from an adjusted close of 19,884. 91 on February 2nd to an adjusted close of 20,071. 46 on February 3rd. The Dow Jones index rose an overall of 186. 55 points for a 0. 93% increase. Below is a graphical representation of the DIJA, which presents a steep increase shortly after the report was released.

ISM Manufacturing index

Another example of an economic release that measures economic health is the Institute for Supply Management (ISM) Manufacturing Index. Investopedia. com asserts that, “[the index] monitors employment, production, inventories, new orders, and supplier deliveries. ” It is considered another report that highlights economic rate of growth for manufacturing activity released on the first business day of every month. The report released on February 1, 2017, measures the previous month’s activity by the Purchasing Managers’ Index (PMI). A PMI score over 50 is considered to be an indicator of manufacturing and economic expansion, whereas a score of 43 and below can be an indicator of economic recession. Institueforsupplymanagement. org states, that the PMI for January was reported at a score of 56, growing a total of 1. 5% from 54. 5 in December. To truly understand the importance of the ISM manufacturing index’s significance for this month and what it means for the general economic climate, we must compare the scores within the past 12 months. Institueforsupplymanagement. org provides a chart of PMI scores within the last 12 months to deduce what a score of 56 means to investors and the economy.

Bond market and interest rates

The bond market is widely known as a safer method to invest money in and is generally inversely correlated with the stock market. Although there are a myriad of different bonds across the spectrum, the 10-year Treasury note has been generally accepted as a scalar gauge for the bond market. With that being said, it is necessary to evaluate the 10-year Treasury note’s reaction to the economic releases. The release of the ISM manufacturing index and the employment situation report were both very optimistic reports. Consequently, interest rates on bonds tend to rise when there is a strong economy and prices tend to fall in order to attract investors. This type of market reaction is reflected in the 10-year Treasury bond as well. Below is a graphical representation of the 10-year Treasury bond and its reaction shortly after the employment situation report was released. The 10-year note’s price actually fell as its yields rose by 2. 1 basis points, further solidifying the bond market’s slight reaction to a decent, yet tentative economic health. Although the employment report presented some indicators of a strong economy, it also underlined a relative decrease in average hourly earnings. This is important for interest rates as it indicates that inflation may not be as quickly on the rise as it may seem. According to a Bloomberg Article by Torres and Condon,“Investors trimmed bets on a rate rise at the March 14-15 Fed meeting to a probability of 24%, versus 32% after Labor Department data showed a less-than-expected 2. 5% gain in average hourly earnings from a year ago. That was the weakest increase since August. ”The Federal Open Market Committee’s chair, Janet Yellen, has hinted at the notion of raising interest rates in 2017. This is why it is crucial to scrutinize economic releases and the markets’ reactions. If the economy displays unrelenting growth, inflation is surely to follow and interest rates may rise. However, if there is even the slightest doubt of economic growth, the Federal Reserve may act conservatively on interest rate hikes.

Commodities and currency

With the possibility of inflation rising due to rapid economic growth, investors may begin to flock towards commodities such as Gold if the dollar weakens. Below are graphical representations of the reaction of the gold commodity market and the strength of the U. S dollar after economic releases. The data above illustrates the inverse relationship between the value of gold and the U. S dollar. Although there are relatively small changes, their reactions may be due to the higher possibility of inflation.

Conclusion

After meticulously analyzing economic releases and their unwavering effect on financial markets, it is time to deduce their impact on the overall economic climate. Even though there were sub-categories in the employment report that had unfavorable decreases, the market had substantial positive increase in value. With that being said, it is evident that investor optimism increased considerably after the release of the employment report and ISM manufacturing index. It is still uncertain whether interest rates will rise due to inflation, yet there is enough evidence that the U. S economy is experiencing prosperous growth amid political turbulence seen within the past year.