Image source: US unemployment rate by Marco Verch is licensed under the CC BY 2.0
Without a doubt, the primary event for this week most market participants will be expecting is going to be the official unemployment rate report for the US economy on Friday. The data will be particularly crucial for a number of reasons but most notably for better comprehending where the yield curve will be heading next.
As you may recall from our previous article on the importance of the inverted yield curve, the main investors’ concern presently is precisely this shifting tone into negative territory by major US data and the potential indication by the curve's inversion that the market might be heading into a recession.
Essentially, the inverted curve is the result of investors choosing Government bonds with long maturity over those with short-term maturity, which means that they do not perceive the current state of affairs within the US economy to be so stable. The only way for investors to regain their confidence in the bright future of the US economy would be for growth rates to start appreciating steadily once more.
A more traditional approach to economics dictates that stabilizing the economy and ensuring the sustained economic growth can be stimulated by paying close attention to the Phillips curve and striving to achieve that perfect equilibrium between inflation and unemployment.
In order to boost the aggregate demand in the economy, and therefore stimulate the economic growth, the Federal Government needs to meet its 2% desired inflation rate, which on the other hand would mean that people have enough incentives to be actively participating in the economic cycle, by spending their capital and thus fuelling the aggregate growth.
Conversely, one of the major steppingstones of ensuring that market behaviour is sustained will be the proper management of the unemployment rate – only employed people have the capital means to participate and stimulate the economic cycle. So, what does this all mean for the outcome of Friday's report? The last time that the US government released unemployment data, the actual rate was reported to be 3.8%, which beat the 3.9% forecasts and was seen as an improvement from the previous month's 4.0 %.
As a result, the US stocks market was relieved from the short-term strain that had taken a hold of it prior to the release of the report, and the Dow Jones Industrial rose with 0.57% in the immediate hours after the report was released, kick starting a new bullish movement that eventually rose with over 700 basis points one week later.
The same kind of investor eagerness can be projected for the release of Friday's report as well, as investors will be examining the data to find out whether a decrease in the overall unemployment will have a positive impact on the well-being of the economy, or in the case that the data is not so promising, resulting from a higher reported unemployment, is that going to further raise doubts about the stability of the US economy.
The forecast for the Non-farm payrolls in the United States is for a total of 172 thousand new jobs, that had been added to the economy. That would be considered as a significant improvement to the previous period’s 33 thousand.
DJI 4H Chart. Image source: Trendsharks ©, created with TradingView.com
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