The U.S Department of Labor releases the employment report on the first Friday of each month. For many years it was the most critical and scrutinized of all the monthly economic reports. If the actual results varied from the consensus estimates panic often ensued. The impact of this report frequently set the direction for weeks and sometimes an entire month.

Inflation Figures Take First Place

The employment situation is healthy at this time and the JOLTS (job opening and labor turnover survey) revealed that about 11 million jobs are available. Hence, the influence of the job reports has diminished. The pandemic had a huge negative effect on the economy, specifically on labor and the supply and demand of good and services. The Central Bank (Fed) and Treasury injected money to help Americans survive the pandemic. The workforce recovered.

However, the result of pumping excessive amounts of money into the system incited a rise in inflation. In other words, there is too much money chasing too few goods. The Fed insisted price pressures were temporary. However, they recently admitted to poor forecasting and recognizing too late that inflation is deeply imbedded in most sectors of the economy.

The Fed’s mandates are to promote full employment and price stability. They failed on the inflation front. Therefore, any economic report that includes price data takes first place on the event calendar. Consumer and producer price indexes are high on the impact list, as is the personal consumption expenditure price index (PCE).

A perfect example of the impact inflation has on markets occurred on Tuesday, Sept. 13. The S&P dropped suddenly and violently following a consumer inflation report that was higher than expectations. Traders figure the hot CPI report may force the Fed to raise interest rates more rapidly and in larger increments. Equity indexes typically fall when the Fed is panicking and forced to be more aggressive.

Volatility and the Fed

When Fed Chair Powell speaks, markets move and often violently. Thus, it is imperative to check the calendar for FOMC meetings (federal open market committee) or when the Fed Chief has a speaking engagement. Stocks, bonds, precious metals and foreign exchange have seen extraordinary moves when the Fed is involved.

I put the Fed second on my list of potential market moving events. Never take your eye off the Fed, even when they are in a holding pattern. A subtle change in rhetoric, particularly about inflation, can turn a snowball into an avalanche.

A recent example of this occurred on Friday, Aug. 26. The PCE price index was hotter than anticipated and Powell spoke that day about the Fed’s unanimous decision to fight inflation even at the risk of spurring a recession.

Learn from Fundamental Changes

Markets reveal a great deal about sentiment when fundamental changes occur. Most traders evaluate several possible outcomes as preparation for scheduled events. The MTM Monday Morning Meeting was implemented to prepare members for weekly events that could alter sentiment. In the afternoon Daily Edge sessions, we review bull, bear and neutral outcomes depending how the event plays out.

A good trader is aware of the impact a move in one sector may have on another. Therefore, make it a point to tag major moves or events on your charts and learn from the reactions.

John Seguin
Market Taker Mentoring