The underemployment rate is an important metric that measures the number of unemployed people, and the number of part-time employees seeking full-time employment but unable to find it. This is a far more realistic measure of the employment situation in a country than unemployment data alone. Consider that US unemployment was measured at 4.8% in January 2017, up from 4.7% in December 2017. Any figure beneath 5% is generally regarded as full employment, but as the above metric indicates, the US economy is nowhere near full employment. In fact, the underemployment rate has been consistently increasing since October 2016 when it was up 12.7% (y-o-y).
By November, it jumped to 13.2%, followed by a rise of 0.5% to 13.7% in December, and 14.1% (y-o-y) in January. Clearly year-on-year metrics differ between the unemployment rate and the underemployment rate. This data provides traders with plenty of cannon fodder to place call and put options on different aspects of the economy. For example, by measuring which sectors added the most or the least jobs year-on-year in January 2017, it is possible to place call or put options accordingly. Health care increased modestly in the latest jobs report, but a repeal & replace of Obamacare could dramatically alter employment prospects in the industry.
What Does the Data Mean for Traders?
On a more practical level, negative economic data releases such as sluggish wage growth, poor underemployment figures, or weak unemployment data don't have any immediate effect on Fed policy. The Fed FOMC will not be so eager to raise the federal funds rate if the economy is underperforming. Recall that the hawks get their way when the US economy is firing on all cylinders. In other words, when unemployment numbers are low and holding steady, inflation figures are rising, NFP data is strong and GDP growth is bullish, rate hikes become more likely. What we have seen in the latest bevy of economic data releases is at best a mixed message. While NFP data increased to 227,000 – well above the forecast figure of 180,000, it is not the only metric to consider.
Wage growth has been sluggish with year on year growth of just 2.5%, missing the consensus forecast of 2.7%, and well beneath the December year on year growth figure of 2.8%. Wage growth is an essential component of economic growth. Without it, inflation will not reach the targeted 2% level. The Fed will be unlikely to tighten monetary policy if wages are not rising as expected. The whole point of monetary easing or quantitative easing, is to accelerate the velocity flow of money in the economy to facilitate credit and investment spending, and to raise prices.
Making Sense of the Rising and Falling Economic Data
We already know that the likelihood of a FFR rate hike in March is slim to none. This directly affects traders when it comes to the USD, dollar-denominated commodities like gold, crude oil, copper, iron ore and the like. Gold demand will benefit from inaction by the Fed. Recall that a stronger USD is bad for gold because it makes it relatively more expensive for foreign buyers of the precious metal. A rate hike is a catalyst in strengthening the USD. In the absence of such a hike, we can expect gold demand to continue with modest gains. While the headline job figures certainly generated optimism with traders, the data was tempered by weakness in key areas.
Even the 2-year treasury note dropped 5 points from its intraday high to generate a yield of 1.18%. The cooling in wage growth is something that will alarm the bulls. Wage growth was steadily increasing since 2013, but it tapered off recently as more Americans try to enter the workforce and less opportunities are available. The mixed economic data provides opportunities for binary options traders on multiple fronts. The USD, precious metals like gold, and key indices like the Dow Jones are all affected by these data releases. Negative data releases generally bode well for gold, while positive data releases are more likely to generate optimism for Fed rate hikes and a stronger greenback. This does not necessarily bode well for US indices.
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