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This last week was repleted with important and having lasting influence data releases. Although the most anticipated and looked for by investors was Non-Farm Payroll Change, published on Friday, its impact on stock market was more than limited. What passed almost inconspicuously to most market participants and observers of different stripes but had significant influence on financial markets was release of Employment Cost Index last Thursday.
The importance of this data is difficult to overestimate – S&P500 lost almost 2% over one trading session, USD gained over 90 b. p. against JPY, over 50 b. p. against AUD and slightly less than 50 b. p. against EUR, NZD, and GBP in a few hours. The most ubiquitous explanation, offered by market pundits, was higher than expected GDP data – 4% (actual) vs. 3.1% (expected), that infiltrated confidence in forex traders.
The offered rationale though seems to be considering confidence of FX traders as completely different entity from confidence of stock market traders that was significantly undermined by exactly the same set of data. This obvious contradiction makes one look for another reason behind markets behavior.
To slightly more jaded observer explanation is evident – the defining data was not better than expected GDP but worse than expected Employment Cost Index (ECI), the broadest measure of labor costs in american economy. Higher than expected and previously released data – 0.7% (actual) vs. 0.3% (expected) and 0.5% (previous) – brought about higher volatility in FX and stock markets. Viable explanation of these phenomena lies in the realm of interest rate changes, promised by the Fed for a long time yet unfulfilled. Market participants stubbornly believe that higher than anticipated labor compensation costs might move Fed to hike interest rates rather sooner than later; these expectations, albeit naïve, of higher interest rates led stock market to swoon and USD to shine.
The importance of this data is difficult to overestimate – S&P500 lost almost 2% over one trading session, USD gained over 90 b. p. against JPY, over 50 b. p. against AUD and slightly less than 50 b. p. against EUR, NZD, and GBP in a few hours. The most ubiquitous explanation, offered by market pundits, was higher than expected GDP data – 4% (actual) vs. 3.1% (expected), that infiltrated confidence in forex traders.
The offered rationale though seems to be considering confidence of FX traders as completely different entity from confidence of stock market traders that was significantly undermined by exactly the same set of data. This obvious contradiction makes one look for another reason behind markets behavior.
To slightly more jaded observer explanation is evident – the defining data was not better than expected GDP but worse than expected Employment Cost Index (ECI), the broadest measure of labor costs in american economy. Higher than expected and previously released data – 0.7% (actual) vs. 0.3% (expected) and 0.5% (previous) – brought about higher volatility in FX and stock markets. Viable explanation of these phenomena lies in the realm of interest rate changes, promised by the Fed for a long time yet unfulfilled. Market participants stubbornly believe that higher than anticipated labor compensation costs might move Fed to hike interest rates rather sooner than later; these expectations, albeit naïve, of higher interest rates led stock market to swoon and USD to shine.