It is my belief that NFP day is the most difficult data release to trade, because the report is intricate and difficult to analyze quickly, as opposed to a rate announcement which is either up, down, or unchanged. 12/4's NFP release startled dollar bears with the "headline" number of -11,000, this following ADP's number of -169,000 on Wednesday. Gold dropped over $48 yesterday, just over 4% just to underline the significance of the surprise.
Market commentary services pointed to reexamination of rate expectations as a result of the "improvement" in the employment situation. But a closer look at the report, in my opinion, casts doubt on this.
First, the long term unemployed has increased.
“Among the unemployed, the number of job losers and persons who completed temporary jobs fell by 463,000 in November. The number of long-term unemployed (those jobless for 27 weeks and over) rose by 293,000 to 5.9 million. The percentage of unemployed persons jobless for 27 weeks or more increased by 2.7 percentage points to 38.3 percent.
About 2.3 million persons were marginally attached to the labor force in November, an increase of 376,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Among the marginally attached, there were 861,000 discouraged workers in November, up from 608,000 a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.”
Long term unemployment does not lead to price inflation, which does not support expectations of a near term rate increase. How can it, when these unfortunate people have limited incomes on which to support themselves?
Secondly, the nature of employment gains has temporarily, if not fundamentally, changed.
“Employment in professional and business services rose by 86,000 in November. Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by 117,000.
Health care employment continued to rise in November (21,000), with notable gains in home health care services (7,000) and hospitals (7,000). The health care industry has added 613,000 jobs since the recession began in December 2007.”
Employment gains in the health care industry has been growing consistently, as one would expect, as the “boomer” generation enters its twilight years.
But more significant are the gains in the “Temp” services industry. A career as a “temp” is far from stable, as current employment is subject to change at the client's whim. And if anyone really believes that the path to economic growth is through a transition to an economy consisting of temporary employment may be in for some disappointing results. My first question, acknowledging the importance of rate expectations in determining long-term trading direction, is whether one could reasonably expect the Fed to change its rate opinion based on positive changes to the employment situation coming primarily from improvements in the temporary employment industry. I think not, given the nature of temp employment. How does one make long term plans based on inconsistent income earned from this occupation? What inflationary price pressures arise from the masses of temp employees?
As traders, a large part of our job is managing risk, protecting our trading capital. We cannot influence the market movements, we can only control our entries and exits. Increased volatility, large movements in price on NFP days at first glance engender dreams of large gains, when one's first thought should focus on limiting loss. And regardless of what our individual interpretations of the data may be, we must trade the reality of the market action, attempting to remain near the front of the herd.
Disclosure: Flat, with long term negative dollar expectations.