3 July 2013

Get a J-O-B to avoid QE

The Fed’s meddling has made global markets dysfunctional and set the scene for the U.S. economy to become a victim of its own success this Friday. We expect the markets to be long on volatility and short on common sense.

With the whole of the trading and investment community waiting for the Fed's next move regarding QE tapering, this week's U.S. employment numbers could be pivotal.

The Fed has on numerous occasions asserted that a stable economic recovery (in the form of higher employment, low inflation and stable GDP growth) is the only prerequisite for slowing/reducing asset purchases. Seeing as annual U.S. inflation (1.4%) is below its 2% target, and annual U.S. GDP growth is 1.8% (after being revised lower from 2.4% in June however), that leaves employment as the remaining factor that is worrying the Fed and investors.

Traders should be aware that the U.S. publishes two sets of employment statistics each month. The famously volatile non-farm payrolls are due this Friday at 08:30 ET / 13:30 GMT / 22:30 AEST but a precursor in the form of ADP employment will be released today at 08:15 ET / 13:15 GMT / 22:15 AEST.

The ADP report is less market sensitive and can often misguide investor sentiment when traders try to inference and second guess what the non-farm payrolls figure will be two days later. We don't recommend guessing what either employment figure will be - instead, we think this week's employment reports will be incredibly market moving so the best strategy is to watch the announcement and take a diectional position after market volatility has calmed. Staying on the sidelines may also not be bad idea.

What’s expected?

ADP Non-Farm Employment Change

Wednesday 3rd July at 08:15 ET / 13:15 GMT / 22:15 AEST
161,000 jobs added in June and confirmation that 135,000 jobs were created in May

Non-Farm Employment Change

Friday 5th July at 08:30 ET / 13:30 GMT / 22:30 AEST
162,000 jobs added in June and confirmation that 175,000 jobs were created in May


In the short-term, labour market improvement is going to help investors come to terms with Fed tapering revelations and could help reset the counterintuitive way investors bought and sold the USD since 2008. The USD would often rise on bad news and fall on good news due to economic fundamentals being trumped by deleveraging/risk flows in and out of USD. This phenomenon should recede as the Fed ‘normalises’ policy and reverts to normality in terms of how economic theory operates within the United States.

Wednesday’s ADP report will be watched more closely than usual because of the insatiable attention on the Fed and economic recovery. A figure above 200,000 will be seen as stellar and likely to add momentum to USD strength seen in most pairs. Fed tapering expectations could strengthen which would push bond yields higher and commodity prices lower.

The interesting aspect is whether the counter-intuitive nature of the markets in recent years now flips to the opposite side i.e. strong US data could prompt investors to expect QE tapering sooner and thus lead to higher short-term interest rates/yields. After an initial spike higher in risk, equities and commodities in celebration of recovery, a strong ADP/NFP headline figure would weigh on stocks and commodities because a huge part of the US corporate sector is dependent on short-term funding and speculators use short-term funding to speculate on commodity markets.

If we see a much weaker number <100,000, market participants will probably expect a fresh wave of Fed support. This would be USD/bond yields negative and commodity/equities positive. In this case, expect to see equity indices to reach their highs as the Fed ZIRP gravy train sets off on another tour.


Be wary of prior revisions to May figures that misrepresent the actual headline figure.

Key levels for order positioning in EUR/USD: 1.2156 | 1.2320 | 1.2840 | 1.3350

Longer Term

In the longer term we are likely to see employment statistics continue to see improvement. If not by hook, then certainly by crook. Just this week, the Obama administration approved plans to delay federal insurance obligations put on US employers as a result of Obamacare. An article covering the news can be read here: http://www.politico.com/story/2013/07/obamacare-provision-postponed-93677.html

This type of behind-the-scenes policy adjustment illustrates the increasing importance of inflating employment figures via any means possible. Additionally, the Bureau of Labour Statistics (BLS) has been tweaking reporting procedures and complicating how employment figures are collated in order to have a semblance of control over what the statistics actually represent. Counter-intuitive schisms such as falling unemployment despite more people being fired are now the norm and conveniently explained by a falling ‘participation rate’ i.e. less people are participating in the labour market thus there is a smaller pool of available workers. The nonsense continues... if more people stop looking for work than are actually hired, that translates to a fall in unemployment in the United States. Maybe the Fed should focus on convincing as many Americans as possible to stop looking for work? This would push the participation rate lower thus reducing the unemployment rate and aiding the U.S. recovery (if you cannot spot the sarcasm in that last comment then you are not paying attention).

The US unemployment rate has been falling steadily from 10% in 2010 to 7.6% in 2013 (according to official BLS figures) in part due to millions of Americans giving up the search for work. In the world of macroeconomic statistics, the U.S. labour market is improving. In reality, U.S. unemployment is somewhere between 20-25% and growing. Additionally, most of the jobs that are added are of a temporary nature located in unskilled, low paid sectors. The buzz word in the U.S. is ‘under-employed’ because millions of people work part time but would take a full-time job if they could – the fact that available full time jobs are diminishing doesn't seem to concern the mainstream media, the Fed and investors. Some market analysts are even suggesting that equity market strength and corporate balance sheet improvement in the US are indicators of a strong US economy! The reality is that market manipulation, management and support via the Fed has been distorting markets since 2007. These distortions are now gradually coming into public view.

With all that being said, traders must always focus on what is in front of them rather than becoming attached with what ‘should be’ occurring. What is currently happening is that the forces of market manipulation and artificial market support are overpowering natural market forces. This will continue until a critical mass of market participants changes their perception of what they are seeing. Despite the anaemia in the US economy, we will probably see monthly improvements in labour market statistics because agencies such as the BLS, Fed and US Treasury prefer to concentrate on short-term perceptions rather than long-term reality.

The Fed’s meddling has made global markets dysfunctional and set the scene for the US economy to become a victim of its own success this Friday (or is that failure?).

Commissioned by Think Forex