Goodbye payrolls, hello ISM

Posted by Scriptaty | 6:16 AM

In 2004 and part of 2005, the market’s focus on payrolls was justified. The U.S. economy was recovering from two consecutive quarters of slower growth in the second half of 2004 and the Federal Reserve needed evidence to proceed with the tightening cycle it began in June of that year.

Payroll reports at the time were extremely volatile, with readings swinging from a low of 38,000 in July 2004 to a high of 338,000 in October, followed by a move back down to 76,000 in January 2005. As a measure of employment in the U.S., the payroll number is extremely important because it gives traders a clear look at how healthy the economy is and could potentially be in the future.

The general belief is that the higher employment is, the more likely consumers will spend liberally, which would be positive for growth. Taken one step further, in an environment where growth is already performing well, stronger payrolls suggest the Federal Reserve might have to raise interest rates in order to tame the growth. For the U.S. dollar, higher interest rates tend to be perceived as bullish because it increases the yield offered by dollar-denominated assets.