In the usa, the bureau of labor statistics (BLS) releases monthly data on the employment rate in the US. The news on employment is released by the BLS just a week after the end of the month reviewed. Because it is released in a timely fashion and under strict supervision, investors are always eager to hear the news and make swift decisions based on the employment / unemployment rate.
The employment rate data is crucial to the investors because it can help forecast future interest rates, corporate earnings and equity risk premium. Also employment rate helps determine the stage the economy is in the business cycle. This is because according to the circular flow of income, the business sector produce goods for the household sector, and the business sector pays the household sector for the factors of production which are mainly land, labor and capital. The business sector in return receives income from the household sector, and if employment rate declines, it might signal a contraction of the economy.
The employment rate shows the percentage of workers who are gainfully employed or unemployed from a total of the work force. If there is an increase in employment, then there is an increase in total wages in the economy. And the more workers earn, the more they propel the more they propel the economy forward. If fewer people are working, demand reduces and so does corporate earnings. This is because the household sector accounts for more than two third of the economy’s total output.
The unemployment rate is the amount of the civilian workforce that is unemployment. Let us now look at the effects of employment and unemployment on bonds, stocks and the currency.
Bonds: It is good news for bond holders when unemployment rate rise. This is because when unemployment rate rises, spending is reduced and the economy becomes sluggish and interest rates are reduced to stimulate economic growth. Bond holders benefit from this because the interest they receive from their earnings is fixed, and regardless of the economic condition they get paid the same interest amount.
In a case of rising unemployment, new loans would be issued at a lowere interest rate; already existing bonds would have hedged this loss because they would still be paid the same amount. The opposite is the case during periods of rising employment. In periods of rising employment, the economy is experiencing economic growth, household spending is increases and to cut off the possibility of an inflation, the federal reserve might raise interest rates.
The bond holders would be at a disadvantage because new bonds or loans would be issued at an higher interest rate while the existing bonds would still receive the same fixed amount. Note: When interest rates rise, the price of bonds would fall and the yield would rise. The opposite is the case when interest rates fall.
Bond yield is calculated by dividing the annual dollar interest rate by the market price of the bond.
It should be noted that if an economy is just coming out of a recession, a rise in employment will likely have only a modest effect on bond prices. This is because there is no immediate risk of inflation.
Stocks: Increase in employment brings an expectation that corporate earnings would rise. This is because an increase in employment brings about an increase in spending’s by the workers who slip into the role of consumers. Although there is an exception to this; when the economy has reached its peak, an increase in employment brings about an increase in interest rates and inflation.
Also the cost of borrowing would be higher for firms, and this would negatively affect the stock price.
When the economy is just recovering from a recession or when it has not reached its peak, little or no growth in employment is generally seen as bad for stocks. This is because it is assumed that households will be less inclined to shop. Less shopping means less earnings for companies and this reduces the incentive to own shares.
News of rising employment can influence the dollar. This is because an increase in employment could drive interest rates higher and increase the value of stocks. United states of America would now be a target country for investments by foreign countries; they can earn more interest income by owning Us treasury bill securities and gain higher from equity values.
Bernard Baumohl., The secrets of economic indicators
Timothy Taylor., The instant economics: Everything you need to know about how the economy works.