NFP, market reactions and unemployment rate universe

So, the NFP data was released on Friday amidst a lot of fanfare. There is an amazing circularity attached with the relevance of this data, it is relevant because everyone watches it, and everyone watches it because it is relevant. A classic chicken and egg tale. But before we write about what was the actual data release both on the NFP numbers and the unemployment rate, it is good to know how the markets reacted. There was a broad base Dollar decline, EM currencies went up, Euro and Sterling gained ground, the yields on US Treasuries fell, US stock markets went up, the Nasdaq once again touched an all-time high.

So, given the reaction of the market one can conclude that the markets like it. At least those who were long equities, long EMFx and short Dollar must have liked it. Anyone who would have gone in with a long Dollar strategy would have stopped out. Now a bit deeper, the new non-farm job additions represent, how well the economy is doing. A reopening economy adds more jobs signalling that people are getting back to work. Now a well-functioning economy doesn’t need the crutches of monetary policy, the rates should normalize. A rising rate should impact everyone living on the Fed’s (the government) largesse. But the market reaction post data suggested that rates are going to remain low and at least this data point doesn’t convince them otherwise.

Let’s look at the actual figures. The nonfarm payrolls rose by 850k better than the 700k estimate by the market, but the unemployment rate climbed up to 5.9% from 5.7% earlier. Hence euphoria of more job creations was tempered by a rise in employment. Markets in all their wisdom believed that this is a mixed bag and Fed won’t act (at least for now). Now this unemployment number which Fed states as one of its key goals is an interestingly amorphous number. Readers can see that given it is a percentage, it has a numerator and denominator. Numerator is how many people were unemployed and denominator is how many people were looking for the job. Now how many people are looking for a job is a tricky terrain.

If readers go to the actual BLS release they will find that apart from the headline number which gets the limelight there is actually a universe of unemployment rates counting from U1 to U6. The headline number in technical terms is U3. The whole spectrum gets defined by what you count as part of the labour force and hence will give different calculation. So, the U4 is defined as total unemployed plus the discouraged workers, as a percent of the civilian labour force plus the discouraged workers. Whereas the U3 is defined as total unemployed as a percent of the civilian labour force. Now for June U3 is 5.9, U4 is 6.2 and U6 is 9.8. Take your pick. Now nowhere Fed has stated that they are tracking U3 as a goal, they have kept it ambiguous unlike the inflation metric where the core PCE reading is the officially anointed metric.

Now we will come back to the world of definitions. What is a discouraged worker? A discouraged worker is one who wants a job but has not actively looked out for a job in the last couple of months. Say for example a cook who knows that the restaurants around are closed and hence is not looking out, the U3 won’t include him in calculation. In case of India a discouraged worker would be let’s say a skilled worker at a construction site who has to migrate back given the site gets temporarily closed. So, the readers would see the drift that there are multiple numbers around unemployment which will impact the Fed’s actions.

But let’s see now from a traders perspective, are these fine distinctions of any aid for trading at 8:30 am EST US (time of data release). Nassem Taleb in his book Fooled by Randomness writes that the market doesn’t assimilate the news in its intellectual breadth. The traders react to the headline number and move on, square their positions, take profits or get stopped out. All these refinements filter post facto and markets by then have already moved on to their new muse. Having sat through all such releases for the last 13 years, we can vouch that he is on point. We will stop here, to figure out our next muse this week.