Magazine article Modern Trader

Employment Reports and Bond Markets

Magazine article Modern Trader

Employment Reports and Bond Markets

Article excerpt

Using a simple technique to track the bond market's response to employment reports can give you a clue on the strength of the economy and the direction of the bond market.

The differences between technical and fundamental analysts are rooted in the opinion of who best interprets and judges fundamental information - the mass market or the individual. Technicians believe the collective interpretation and judgment of market participants is superior to that of the individual.

An individual's judgment often is skewed toward the implications of the most recent market data. Let's say an economist is sitting at his desk formulating his economic opinion. Just before laying out his ideas, he read the latest retail sales report, which was weaker than expected. The technician would believe the economist is inclined to assign undue importance to the report because that data is the freshest thing in his mind. From this perspective, the economist's view of the bond market would be more bullish than it should be, given the population of economic data.

Additionally, an individual's perception and judgment is sometimes biased by what technicians call the "I'm feeling good" or "I'm feeling bad" effect. Let's say a local on the floor just made a losing trade. Later, when he walks over to the news wire to decide on a new market view, he might first conclude destroying something is the best thing to do, and his negative mind-set would result in the desire to sell. In this case the local's judgment is biased and not reflective of the fundamental news.

Technical analysts assume when there are thousands monitoring, interpreting and judging the fundamentals, individual biases cancel each other out. The economist's overly bullish view will offset the local's unwarranted bearish view and Ms. Smith's extreme bullishness will cancel out Mr. Jones' overly pessimistic viewpoint. So when everyone executes his or her trades, the resulting market price accurately reflects the fundamental picture. Given this, technicians analyze the price as the means to gauge the fundamentals, rather than analyze the fundamentals (like the money supply, inflation or GDP) directly.

Bonds, employment reports and the economy

The bond market and economic activity are linked by the demand for long-term credit. As the economy strengthens, the private sector's demand for credit increases. This causes long-term rates to increase and bond prices to fall. When the economy weakens, interest rates decrease and bond prices rise.

Summing it up

Date               Price change     Indicator

April 5                -71             -189
March 8                -96             -115
Feb 1                  -28              -26
Jan 19 (1995)           +6              +10
Dec 8 (1994)            +3              +21
Nov 3                   -7              +51
Oct 6                   +8             +108
Sep 1                  +13              +87
Aug 4                  +10              +97

The monthly employment report is an excellent barometer of economic activity, containing an assortment of data from many sectors of the economy: employment and wage levels, as well as hours worked by employees in the government, manufacturing and service sector of the economy. Given the breadth of the data, the previous month's income, production levels and inflation rate can be estimated.

If bond traders drive prices lower in response to the employment release, technicians, believing market participants know best, infer the economy strengthened the previous month. …

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