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Understanding ‘Employment Trends Index’ and The Impact Of Its News Release On The Forex Market

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Introduction

In any economy, the employment rate can be said to be the primary driver of economic growth. Due to its importance, several fundamental indicators track the labor market changes and many more attempting to predict the future of the labour market. Government and central banks’ policymakers may feel comfortable poring through all these economic indicators for the labour market, but for regular forex traders and households, keeping track of all these labour market indicators can be tiresome and even confusing. The Employment Trends Index (ETI), one of the most relevant labour market indicators, is making it easier to understand the labor market trends.

Understanding the Employment Trends Index

The Employment Trends Index is made by aggregating eight labour market economic indicators. The ETI report breaks down which labour market indicators positively impact the ETI and ranks them from the most positive to the least. Through the aggregation of these indicators, the “noise” in the labor market trend is filtered out. It is worth noting that these labour market indicators have shown to be accurate in their areas. These indicators are explained below.

Initial unemployment claims: This labour market indicator is collated and published by the U.S. Department of Labor. The indicator is published the Thursday of every week, and it shows the number of people who filed for the unemployment benefits for the first time. It is thus considered the latest indicator of unemployment.

Job openings: The U.S. Bureau of Labor and Statistics publishes this economic indicator. These job vacancies show the gap in the labour market that needs to be filled. It indicates the unfulfilled demand in the labour market and the desirable skills sought by employers. It further shows the potential of households to be gainfully employed in the short term.

Number of Employees Hired by the Temporary-Help Industry: The U.S. Bureau of Labor Statistics publishes this statistic. It shows the relationship between the labour market and business cycles since most businesses hire more temporary workers during peak periods and expansion phases.
The ratio of Involuntarily Part-time to All Part-time Workers: Published by the U.S. Bureau of Labor Statistics, this indicator shows the number of employees who are forced to work part-time. The indicator can be correlated to sub-optimal economic conditions, which would make filling positions full time uneconomical. An increasing ratio indicates worsening economic conditions.
Industrial Production: This indicator shows the level of output in sectors such as mining, manufacturing, and energy. The U.S. Federal Reserve Board publishes it. An increasing industrial production indicates that the employment levels are increasing while dropping industrial production levels signals higher levels of job loss.

Source: St. Louis FRED

Percentage of Respondents Who Say They Find “Jobs Hard to Get”: This indicator shows the scarcity of employment opportunities in the economy. Higher percentage signals either a stagnating or a shrinking economy. The Conference Board Consumer Confidence Survey publishes it.
Percentage of Firms With Positions Not Able to Fill Right Now: This statistic shows the lack of particular expertise in the labour market. It is published by the National Federation of Independent Business Research Foundation.
Real Manufacturing and Trade Sales: This indicator shows the level of engagement in the labour market, and the U.S. Bureau of Economic Analysis publishes it.

How to use the Employment Trends Index an analysis

The fact that the ETI aggregates most of the crucial labour market indicators makes it an ideal tool for analyzing the economy.

Since the labour market is considered one of the primary drivers of the economy, monitoring its trend can be used to detect the onset of recessions or recoveries. Here’s how. When the ETI is continually dropping, it indicates that the labor market conditions are worsening progressively. This condition is accompanied by a constant drop in the aggregate demand and supply, most consumer discretionary industries will go out of business, and the economy will progressively contract. Conversely, during a period of economic recession, an increase in the ETI signifies that the economy is on a recovery path.

An increase in the ETI does not necessarily mean that each of the underlying eight labour maker indicators improved. A higher ETI could mean that most of these indicators were positive, or they all were. In either of these instances, it means that the overall labour market is improving – it shows that labour conditions are improving. One of the most notable impacts of an improving labour market is the improvement of households’ welfare, which increases the aggregate demand and supply in the economy.

Source: St. Louis FRED

Conversely, a dropping ETI could be caused by a majority of the underlying labour market indicators being negative or all of them being negative. In either of these instances, the labor markets’ conditions are deteriorating, a condition usually punctuated with higher unemployment levels.

Impact on Currency

The ETI could be associated with contractionary and expansionary monetary and fiscal policies. Here are some of the ways that the ETI could impact a country’s currency. A continually increasing ETI means that the labour market has been enjoying a long period of constant growth. Such an instance signifies that the economy has been expanding, the welfare of households improving, and the unemployment levels low.

In any economy, if these conditions are not sustainable, an overheating economy with unsustainable levels of inflation becomes prevalent. In this case, the governments and central banks may be induced to implement contractionary monetary and fiscal policies. Thus, in the forex market, an increasing ETI can be a precursor for higher interest rates, which makes the currency appreciate relative to others.

A constantly dropping ETI is negative for the currency. The dropping ETI means that the overall labour market has been performing poorly. It means that more people are losing their jobs, wages are low, overall aggregate demand is dropping, and the economy is shrinking. With higher unemployment levels, governments and central banks tend to implement expansionary fiscal and monetary policies to stimulate demand and prevent the economy from sinking into a recession. These expansionary policies, such as lowering interest rates, makes the currency drop in value relative to others. In the U.S., the ETI data is published monthly by The Conference Board.

How the Employment Trends Index Report Release Affects Forex Price Charts

The latest release of the ETI report was on September 8, 2020, at 10.00 AM ET and accessed at Investing.com. The screengrab below is of the monthly ETI from Investing.com. To the right is a legend that indicates the level of impact the fundamental indicator has on the USD.

As can be seen, low volatility is to be expected.

In August 2020, the ETI was 52.55 and increase from 51.37 in July 2020.

Now, let’s see how this release made an impact on the Forex price charts.

EUR/USD: Before the ETI Report Release | September 8, 2020. Before 10.00 AM ET

As seen in the above EUR/USD chart, the pair went from trading in a neutral trend to a steady downtrend. The 20-period M.A. is steeply falling with candles forming further below it.

EUR/USD: After the ETI Report Release on September 8, 2020, at 10.00 AM ET

After the ETI report release, the pair formed a bearish 5-minute “Doji” candle. Subsequently, the pair adopted a weak bullish trend with candles forming just above the 20-period M.A.

Bottom Line

In the forex market, traders rarely pay close attention to the ETI. Most traders prefer gauging the underlying aggregated indicators separately, which explains the lack of impact by releasing the ETI report since the index shows what traders already know. It only serves to show the trend.

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