Traders get quite agitated when there’s a strong jobs report, especially if it’s unexpected. The news can portend accelerating inflation and rising interest rates, both of which are anathema to bondholders. Thus, be prepared for a sell-off in fixed income securities when job creation is surging. How far bond prices will fall and how much yields will rise depends on many factors, but the most important is where the economy happens to be in the business cycle. If the U.S. has just managed to climb out of recession, a jump in employment will likely have only a modest effect on bond prices because there’s no immediate danger of inflation.
However, if employment accelerates when the economy is already operating at or near peak capacity, prepare to see a steep drop in bond prices and sharply higher interest rates.
In contrast, a series of weak employment reports reflects a more sluggish economy, which is bullish for bond prices and means interest rates will head lower.
News of robust employment can make equity investors positively giddy. As the number of people holding jobs increases and the workweek expands, employees easily slip into the role of consumers and spend more money. The result: Expectations rise that business sales and profits will pick up in the future.
This can set the stage for a rally in the equity market. The only exception is if the economy is overheating with interest rates and inflation turning up. The higher cost of borrowing will hurt companies and undermine stock prices.
Little or no growth in employment is generally seen as bad for stocks. The worry is that households will be less inclined to shop. Weak sales can shrink corporate income and earnings, thereby reducing the incentive to own shares.
Employment news can greatly influence the dollar’s value in currency markets. A vigorous jobs report could drive interest rates higher, which makes the dollar more attractive to foreign investors. They can now earn more interest income by owning U.S. Treasury securities. On the other hand, an anemic jobs report softens demand for U.S. currency because it spells trouble for American stocks and puts downward pressure on rates, both of which make the dollar less appealing to foreigners.