Many economic indicators and surveys are made public and reported on the news each week. The economic surveys are so many, and the data usually make very small changes that it is easy to fail to notice the importance that this data has on the economy and the markets. There are various indicators that help one to understand the dynamics of the economy. Knowing the market indicators and keeping tabs on the economic releases helps interested parties to be better prepared to foresee and respond to future market developments. They include; employment, investment, consumer activity, and inflation. For the purpose of this report, only employment and investor activity is briefly explained in this introduction section.
Employment, which will be analyzed extensively in this report, is probably the most important indicator of the economy’s health. The United States Bureau of Labor and Statistics releases a monthly unemployment report and the nonfarm payroll on the first Friday of each month. The unemployment report shows the latest unemployment rate. The nonfarm payroll shows the number of jobs that have been gained or lost in the United States economy. Participants in the market keenly look out for these reports and the usually result in the major one-day movements in the stock and bond markets. The employment situation influences other important economic indicators, for example, consumer attitudes and consumer confidence.
Apart from employment, participants in the market look closely at measures of investor activity. The reason that they focus closely on investor activity is to gather market clues. Popular belief notwithstanding, the most appropriate time to invest is not when everyone is optimistic about stocks and when trading of stocks is active. The best time to invest is when investors are pessimistic. If everyone is optimistic, there is no one that is left to trade stocks to take the prices higher.
Understanding what the economic and market indicators affect markets should not be the ultimate goal for market players. The goal is to know how to interpret the economic indicators and deciding their probable market impact. Besides the fixed level of an economic indicator, two other main factors to consider are the tendency in the indicator and the market anticipation for that indicator. When they are taken together, they usually determine the market reaction to a certain economic or market report. Learning to look forward to the market’s reaction to a variety of indicators needs a careful observation of financial markets and knowledge in deducing these reports. This report is a summary of important economic releases September 4 and the reactions to it.
Payroll Employment and the Unemployment Rate
The United States economy grew at a yearly rate of 2.8% over the last two years in comparison to the 2.1% rate in the initial three-and-a-half years of economic recovery (Economic Report of the President 1). The economic expansion is, for the most part, observable in the U.S. labor market where the rate of job gains has gotten better every year (Economic Report of the President 1). The American private sector has established more than 10 million new jobs in a span of 59 consecutive months (Economic Report of the President 1). 2014 was the strongest year for job growth since 1999 on the whole, creating 3.1 million new jobs (Economic Report of the President 1). The unemployment rate fell by 1.3 percentage points from 2013 to 2014. It was the largest unemployment rate reduction in the last thirty years. A decline in long-term unemployment which was one of the main post-economic crises problems constitutes most of the decrease in unemployment rates (Economic Report of the President 1).
United States’ employment growth was slow in August (Mutikani par 1). People expected that the unemployment rate would increase, but the unemployment rate fell to almost an eight-year low and wages increased (Mutikani par 1). The unemployment rate went down by 5.1 percent, and the number of unemployed people fell by 8 million (Bureau of Labor Statistics 1). These figures kept hopes alive of a Federal Reserve interest rate increase later in the month. The gains in August were the most negligible in the preceding five months because the factory industry experienced the most employment loss since July 2013 (Mutikani par 1).
The job count may have been tainted by a statistical accident that has time and again resulted in sudden upward alterations to payroll figures for August following weak preliminary reports (Mutikani par 3). It shows that the employment deceleration was probably not commensurate with the economy’s true state. The unemployed rate went down two-tenths of a point to 5.1 percent that was the lowest since April 2008 (Bureau of Labor Statistics 1). Additionally, the June and July payrolls figures were adjusted to indicate 44,000 additional jobs created than formerly reported (Mutikani par 5). As a result, it brought the middling job increases for the last three months to 221,000 (Mutikani par 5). Standard hourly incomes increased by 8 cents that were the greatest increase in seven months (Mutikani par 5). The duration of the average workweek also extended.
Stocks on Wall Street, which could be under pressure from elevated rates, closed down more than 1 percent (Blakely part 1). The costs for U.S, government debt increased while the dollar plummeted slightly against other world currencies (Blakely part 1). Despite the fact that the mixed report did not do much to change the outlook that the U.S economy is still vibrant in spite of unstable global financial markets and dawdling global financial markets and slow Chinese growth, it could complicate further the Fed’s decision at their policy meeting. Following the latest international equities sell-off, financial markets considerably leveled back stakes on a September rate climb in August.
The United States Bureau of Labor Statistics’ employment report of September 4, 2015, got mixed reactions at the stock market. Due to these employment statistics that may have made the Fed irresolute, the U.S stock market found itself in a state of confusion (Blakely part 1). Investors were seemingly doubtful, and the SPDR S&P 500 ETF dropped by 1.51 % on September 4 (Blakely part 1).
The report on employment and average earnings showed that the domestic economy of the U.S is good. But when observing the Fed’s hesitation surrounding the rate increase, a few key factors must be taken into consideration. The U.S. dollar got stronger immediately before the release of the employment report (Blakely part 2). A rise could translate into more expensive exports from the United States markets, over and above increased trade shortfalls (Blakely part 2). Again, the sudden hold-up in China that affected the goods and oil industries caused the world economy to falter (Blakely part 2). Fourthly, the demand for oil is decreasing against the increasing oil supply (Blakely part 2). Lastly, the U.S. inflation is still low (Blakely part 2).
A dollar rate increase could result in a capital flight from the equity market to the bond market (Blakely part 2). It could also have led to capital flight from up-and-coming markets like China to vibrant markets like the United States (Blakely part 2). Not all these prospective outcomes lead to a sure course of action until the Fed’s communicate a clear message after its meeting. Thus far, the US market should go on experiencing difficulties. The US Bureau of Labor Statistics’ employment report had encouraging figures for the US local economy. However, the numbers were not solid enough to instigate an interest rate increase by the Fed (Blakely part 3). The doubt concerning this decision or a lack of it affected UK investors in the midst of the financial chaos in China, which has depreciated the Euro against the US dollar (Blakely part 3).
After the report was released, the 10-year treasury declined 6.3 basic points. The 10-year yield also fell 4.0 basic points over the week, making the longest string of declines since January. The fall in the treasury yield marked its fourth continuous weekly decline since the July report. The yield on the 2-year note which is more sensitive to rates move rose 1.6 basic points and gained 4.8 basic points over the week which is the largest one-week gain since June. In addition, the 30-year bond yield declined 8.2 basic points. It is evident that the shorter dated yields rose. This shows that investors had hopes of a near future rate hike thus trading more in the short-term yields.
As at August, out of the 18 manufacturing industries, 10 are showing prospects of growth (Cahill 1). These industries are Paper Products, Textile Mills, Non-metallic Mineral Products, Furniture and Related Products, Food, Beverage, and Tobacco Products, Chemical Products, Plastics and Rubber Products, Miscellaneous Manufacturing Products, Machinery, and Fabricated Metal Products (Cahill 1). The six industries showing decline are Transportation Equipment, Electrical Equipment, Appliances & Components Apparel, Leather & Allied Products, Primary Metals, Petroleum & Coal Products, and Computer & Electronic Product (Cahill 1).
Manufacturing grew in August as the Purchasing Managers’ Index recorded 51.1 percent that was a decrease of 1.6 percent points from July which was 52.7 percent showing a growth in manufacturing for the 32nd month straight (Cahill 3). The August Purchasing Managers’ Index analysis was the lowest since May. The PMI analysis in May was 50.1 percent. A PMI percentage of more than 50 percent is an indication that the manufacturing economy is growing (Cahill 3). A reading of less than 50 percent shows that the manufacturing industry is constricting (Cahill 3). A PMI that is more than 43.1 percent over a relatively long period indicates a growth of the economy in general (Cahill 3). Hence, the August PMI shows an expansion for the 75th month straight in the whole economy (Cahill 3). It also shows growth in the manufacturing sector for the 32nd month (Cahill 3).
In the past, the relationship between the PMI and the economy in general shows that the standard PMI from January to August, which was 52.4 percent matches the 2.9 percent rise in real gross domestic product on a yearly basis (Cahill 3). Additionally, if the PMI for August at 51.1 percent is converted to an annual basis it matches up to a 2.5 percent rise in real GDP per year (Cahill 3).
Blakely, R 2015, SPY and EWU Hobbled by Fed’s Rate-Hike Indecision Following September 4 US Employment Report. Web. 16 Sep 2015. <http://marketrealist.com/2015/09/us-employment-report-released-september-4-staggers-spy-1-51/>
Bureau of Labor Statistics 2015, The employment situation-August 2015. PDF File. 16 Sep. 2015.< http://www.bls.gov/news.release/pdf/empsit.pdf>
Cahill, K 2015, August Manufacturing ISM Report. PDF File. 16 Sep. 2015. <http://ism.files.cms-plus.com/ISMReport/Mfg_Aug_15.pdf>
Economic Report of the President 2015. PDF File. 16 Sep. 2015. <https://www.whitehouse.gov/sites/default/files/docs/cea_2015_erp.pdf>
Mutikani, L 2015, U.S. labor market shows some muscle despite slower job growth. Web. 16 Sep 2015. <http://www.reuters.com/article/2015/09/04/us-usa-economy-idUSKCN0R40CT20150904>
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