Jobs Reports and Stocks Explained

by Darwin on December 29, 2017

Every month, the US Bureau of Labor Statistics releases an employment situation report (commonly referred to as a “jobs report”) that tends to cause sharp moves either up or down in equity markets around the world. Although this cluster of data mainly provides insight into the labor market, the implications are extensive for investors.

Simply put, the monthly jobs reports gives market participants a vague idea of how the US economy is performing and, obviously, provides insight into labor and wage trends. However, investors are not the only ones keeping a close eye on this employment data; the Federal Reserve monitors it as well. Because savvy market participants know this, jobs reports directly lead to speculation in the marketplace on when/if the Federal Reserve will raise or lower interest rates in an attempt to control earning inflation and other economic principles.

To even the well-versed investor, all of this talk about wage inflation trends and interest rates can be understandably bewildering. Nevertheless, when it’s broken down into a few manageable pieces, the effects jobs reports have on virtually every market in the world become much easier to comprehend. Looking at the correlation between jobs reports and gold provides a great example of how jobs data impacts financial markets.

Specifically regarding the gold market, the correlation between jobs reports and the price of gold is as follows:

Strong jobs report = possible higher interest rates = gold goes down

Weak jobs report = possible lower or unchanged interest rates = gold goes up

The reasoning behind gold going up or down is a tad more complex than it appears in the equation above, in part because the price movement depends on what a “strong” or “weak” jobs report really means. If the US economy adds fewer jobs than expected, which would constitute a weak jobs report, then the Federal Reserve would theoretically be less likely to aggressively hike interest rates, because, according to the jobs report data, the economy is fragile and would not do well with higher fed fund rates.

Conversely, if the US economy adds more jobs than expected, it indicates economic robustness, and an interest rate hike would not be of detriment to the economy and, in fact, might be necessary to reach/control federal reserve inflation target goals.

This is where the jobs report and gold discussion really starts to get interesting. Conventionally, high interest rates are not favorable to the price of gold, and low interest rates are seen as very favorable. The reasoning behind this is relatively simple. When it gets more expensive to borrow money because the Federal Reserve raises their benchmark borrowing rate, it’s nonsensical to pay more in interest to buy an asset like gold which inherently pays nothing when compared to interest-bearing instruments like bonds.

There is, however, a massive caveat to all of this analysis about gold and jobs reports. Over the short-term and especially intraday, jobs reports and interest rates do indeed affect the price of gold, but over the long-term, the price of gold is influenced more by supply and demand and other economic/world events than employment data.

Often before a jobs report is released, options for correlated assets, like US equity indices, gold, silver, and bonds will become more expensive to purchase. This is because uncertainty typically increases prior to a jobs report is released. Investors never know what the jobs data will say, and they are therefore willing to pay more premium to protect their long or short positions.

Additionally, it is worth noting that gold (or any asset) could theoretically rally on a strong jobs report and sell-off on a weak jobs report (i.e., do the opposite of what is expected), because the aforementioned conventional wisdom regarding jobs reports and gold is by no means a certainty. With that said, a negative correlation between jobs reports and gold certainly exists over the short-term, but on a longer time horizon, the correlation seems spurious and the future effect remains unknown, much like any market.

In spite of this, it is still important to be informed of what a “strong” or “weak” jobs report will mean for a gold investment. By knowing this, investors, or anyone looking to trade a binary event, can have a leg up on the rest of the market and capitalize on the entry opportunities that arise from jobs reports.

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