The financial markets, like any efficient market, are driven by supply and demand for security. In the stock market, there are numerous drivers of supply and demand that exist, but some of the most important and consistent external factors include economic data, geopolitical events and government/agency interventions.
Often, a combination or even all these factors affect the market simultaneously. A new geopolitical issue arising could lead to an underwhelming or overwhelming economic data print, which may cause the Federal Reserve to act in a never-ending push and pull of external factors affecting the market.
Specifically in terms of economic data, the establishment survey and household survey are two employment data releases that the markets, financial analysts and traders watch very closely. Given that the Federal Reserve has started to cut rates, these reports are watched even more keenly than when there is no movement expected.
Establishment vs. Household Survey Insights
The establishment survey, also known as the Current Employment Statistics Program, is a monthly survey of approximately 119,000 businesses and agencies throughout the United States. The output of the monthly survey provides insight into nonfarm wage and jobs numbers at an industry level, estimating the month over month employment change in businesses, as well as the creation or dissolvement of companies in that period.
The household survey, also known as the Current Population Survey, is designed to sample the population’s labor force and measure demographic-based employment trends. The household survey provides perspective into the labor force that the establishment survey does not cover, accounting for self-employed people, agricultural workers and other exceptions to being employed by a business. The most widely used output of the monthly household survey is the national unemployment rate.
A Soft Landing?
The labor market is the second part of the Fed’s “dual mandate” of maintaining healthy inflation and employment levels. The August jobs report from September 6 provided support that the labor market is cooling off as opposed to collapsing. While the U.S economy added fewer jobs than expected, the 142,000 additions was still a healthy number.
The expectation that unemployment would drop in tandem with the jobs report came to fruition as the unemployment rate edged slightly lower to 4.2% from 4.3%. While the unemployment rate is still historically low, it has steadily risen over the past year.
This report was one of the more consequential data releases since the Fed began hiking rates in 2022, as the market had seen some recent weakness and data revisions to the establishment survey were recently revised down by 818,000 during April 2023 and March 2024. These factors likely influenced the Fed’s decision to cut rates by .50% at their September meeting.
Market Confidence
Releases in line with expectations may reassure investors, and the Fed, that the economy is still trending toward the coveted “soft landing.” Such a data print may signal to institutional investors that all is well, potentially reaffirming the bulls’ strength. For the Fed, it could signal that their policy is working as intended.
In the most recent September Jobs report from October 4 the unemployment rate fell slightly again to 4.1% and the U.S. added more jobs than expected. Monday-expiring CME Group Treasury options volume spiked to a record 257K contracts on the day of the release, fueled by strong non-farm payrolls data from the establishment survey.
One way to manage risk around an upcoming release is by purchasing what is known as a strangle, which is an out of the money put and an out of the money call. A larger than expected move in either direction is the best outcome for this type of position, and the maximum risk on this type of position is the net debit paid.
There are a myriad of external factors that push and pull the market daily, and data releases are just one part of the picture.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
