Stock market indices in the United States ignored the NFP Report and climbed to new highs. Why did investors shrug off the worse-than-expected jobs data?
The Employment Situation Summary for the month of April was released by the US Bureau of Labor Statistics last Friday. The report surprised the markets by showing “only” 266k new jobs created by the world’s largest economy, much less than the market expected.
In normal times (i.e., not during a pandemic), such a number would be a staggering one. Yet, the market expected a stronger bounce, with some analysts having predictions of two million new jobs to be created in April.
But there is a new reality, a surprising one – people are not rushing to get a job. Many still have savings from the state-offered financial aid, which was generous, even for middle-income families. In other words, businesses are struggling to hire new people, and will need to come up with innovative and more expensive ways to attract workers.
Details of the May 2021 NFP Report
The unemployment rate remained unchanged at 6.1% in April, and the number of unemployed was also unchanged at 9.8 million. Also, the labour participation rate did not change much, coming out at 61.7% in April. One big problem on Friday’s report was the number of permanent job losers remains stubbornly high, 2.2 million higher than in February 2020.
Across sectors, the data was mixed. For example, the retail trade employment dropped by 15k in April, after a gain of 33k in the previous month.
Financial services, on the other hand, added 19k jobs over the month, with the real estate and rental and leasing in the forefront. Still, compared to February 2020, employment in financial activities is still down by over 60k jobs.
Financial markets took the report hard at first. On the release, the US stock market futures declined sharply, as did the US dollar.
When important economic data is due, trading algorithms are instructed to buy or sell based on the actual versus the forecast. If the actual is better than the forecast, algos buy the US dollar if the data refers to the US economy. On the other hand, if the actual is worse than the forecast, algos sell.
After that, the stock market indices bounced strongly from their intraday lows. In fact, the S&P500 reached a new all-time high shortly after the opening. It tells us much about what drives the price action (i.e. investors’ expectations about future growth), and what truly matters for financial market participants.