On the first Friday of each month, the government releases data on the employment situation. Of all the monthly reports, job numbers have the most impact on interest rates and the ETFs that track yield, notably TLT and IEI. That impact often reverberates in currencies, precious metals and occasionally the equity indexes. We saw the impact a rate cut had on stock indexes on Wednesday, July 31.

The day ranges for many markets are well above average on Payroll Fridays. This report is frequently responsible for setting an extreme (high or low) for a week or two. Quite often the high or low for the month is made on the day of this report or shortly thereafter. July’s high was made on the day of this report.

The table below shows the average day ranges for interest rate futures and the average range on employment day.

The most scrutinized components of this report are nonfarm payrolls and the unemployment rate. Federal Reserve policy makers pay close attention to these data. Economists and analysts reveal labor market estimates prior to each release. From these numbers consensus estimates are posted. For Friday’s (Aug. 1) report, nonfarm payrolls are expected to have grown by 155,000 jobs and the unemployment rate consensus is 3.6%. The current prices in treasury futures reflect these expectations. The direction the markets will take Friday will be determined by the difference between estimated and actual numbers. Generally, fixed income futures will rise if the data are weaker than expected (lower nonfarm, higher rate) and fall if the numbers are better (higher nonfarm payrolls, lower unemployment rate) than anticipated.

Interest rate futures affect many other markets. Recently the markets that correlate closely to treasuries are gold and the dollar, mainly versus the euro and yen.

In preparation for Friday’s report odds favor a rise in treasuries and precious metals and dollar weakness (euro and yen strength) if the data are much weaker than consensus estimates. On the other hand, if the data are much stronger than expected, treasuries should fall (interest rates rise), gold should weaken and the dollar rally.

Job reports are basically a starting point each month. Momentum often becomes clear and gives us a direction to lean on for not just treasuries, but peripheral markets as well.

John Seguin, Market Taker Mentoring