[MUSIC] Learning goals. After watching this video, you will be able to explain one of the most important economic indicators, the job report, or the employment situation. You will also be able to predict the movements in stock markets, bond markets and currency markets in response to the job market report. In layman situation, a job report is one of the most eagerly awaited news on the economy. Why is that so? Because we get to know are jobs being created. What's the latest unemployment rate like? That is of tremendous economic significance. Perhaps no other economic indicator can stand stock markets and bond markets as much as the jobs report. It really is the big one, why? Because wages and salaries from jobs make up the main source of household income. The more people like you and me earn, the more we buy and therefore boost the economy going forward. If lesser people are working, if lesser jobs are being created, then spending drops off and businesses suffer. Household spending accounts for a large portion of the economy's total output. For instance, in the US it accounts for more than two-thirds of the US economy. So you can see why the investment community pays such close attention to the jobs report. There's one more reason why it holds such a sway on financial markets and investors. That's because the jobs numbers often contain surprises. The best of experts have difficulty predicting the unemployment figures. What effect does the jobs report have on the stock markets, on the bond markets, and on the currency markets? As far as stocks are concerned, news of robust job creation can make equity investors hugely bullish about the economy in general and equity markets in particular. When people have jobs, they're spending more and when they don't have jobs, they're perhaps spending lesser. Like if you're a working professional you probably spend much less as a student then your perhaps doing now. So as the number of people holding jobs increases, these working professionals over the weekend slip into the role of the consumers and spend money. They go out, they're shopping, so basically what this does is that expectations that businesses stays in profit and pick up in the future increase. So people to expect businesses to have greater sales and greater profits. That sets the stage for a rally in equity markets going forward. How much will the equity markets rise? That depends on the business cycle. In general, robust job creation means good news for equity markets. Little or no employment is generally seen as bad for stocks and equity markets. The worry is that households will be less inclined to shop. If you don't have jobs you probably will be spending much lesser and therefore the economy integrates at first. Weak sales can shrink corporate income and profits and therefore reduce the incentive to own shares. What effect does it have on bonds? Creditors get quite agitated when there's a strong jobs report, especially if it's unexpected. The news can warn off accelerating inflation, rising interest rates, both of which are a blow to bond holders. If I'm holding a bond and if inflation increases or interest rate increases that's bad for me. So you should be prepared for a sell off in fixed income securities when job creation is surging. Now how far will bond prices fall and how much will yields rise? That depends on many factors. But the most important is where the economy happens to be in the business cycle. So if the economy is just, it's just managed to climb out of a transition, a jump in employment will likely have a very modest effect on bond prices. Because there's no immediate danger of inflation, the economy is just coming out of recession and it's not going to affect bond markets too much. However, if employment accelerates, if the economy is already operating at or near peak capacity, be prepared to see a steep drop in bond prices and sharply higher interest rates. In contrast, a series of weak employment reports reflects a sluggish economy, which is bullish for bond prices, and means interest rates are actually heading lower which means prices are increasing. Therefore you will be bullish on the bond markets. What effect does it have on currency? Employment news can greatly influence a domestic currency's value. A vigorous job support, a very good job support could drive interest rates higher and rally stocks. Which makes the domestic currency more attractive to foreign investors. So if I'm a foreign investor, one thing to invest in the local economy and the job support is good, then I would typically go out there and invest more. They earn more in terms of equity returns and also in general returns increase. On the other hand, an anemic jobs report softens demand for domestic currency because it spells trouble for the economy which would make the currency less appealing to foreigners. [MUSIC]
