How to Trade Employment and Retail Reports

If the numbers published for the employment report and the retail report are positive the reaction of the financial markets will be negative.

Introduction:

Published monthly the employment report measures the employment in the non-farming payrolls and is seasonally adjusted. The retail sales report which is also published monthly measures the dollar value of a basket of goods which are sold in the retail trade. Both these reports are keenly awaited by traders in the�forex�market.

How to Trade Employment and Retail Reports:

The interesting thing about these reports especially for�forex�traders just starting out in the business is that when the reports are positive or good they have a negative response from the�financial markets. Why is this?

Naturally everyone is happy when there is full employment because that means that there are positions available for everyone. In actual fact a 5% unemployment rate is considered full employment because there are people constantly looking for a job, there are those in part time work and of course pensioners. As the job market contracts the job competition increases and at the same time salaries increase to attract the best people. This makes the cost of doing business much more expensive and these costs are invariably passed onto the consumer. The consumers then have a choice; they can either look for cheaper goods elsewhere or they can pay the higher prices. Higher prices eventually lead to higher inflation and the possibility that interest rates could be increased by the government.

This is also the reason why the retail report has a negative effect on the financial markets. One of the biggest drivers of an economy is consumer spending so the retail report is somewhat delicate as too much consumer spending leads to an oversupply of money chasing fewer goods which in turn leads to higher prices, higher inflation and higher interest rates.

These are the reasons why the good news has a negative effect on the financial markets. Let's now look at how to take advantage of this knowledge and look for trading opportunities before or after the reports have been announced.

How to apply the publication of the employment/retail report to a possible trade:

The employment report for March 2012 shows an expected 9,000 more people in jobs from the last month (365-356). The published number was better than expected and came in at351k�a jobless reduction of 14,000.

The retail sales report also showed a better than expected figure. Economists were expecting an increase of 0.04% but in fact the increase was 0.05%. The market reacted to these good numbers by selling the dollar. Just before the numbers were published the dollar was appreciating but soon after the numbers were published the dollar was sold off against all the major currencies.

To�summarise, the employment report and the retail report do slightly impact on �the�financial markets�especially as they give a possible insight into the future direction of interest rates and the volatility of� currency movements. If the employment report shows unemployment falling and the retail report is showing that consumer spending is rising the dollar should be sold. Currency movements as a result of the publication of these reports is always short term, maybe just a few hours and even sometimes there is no discernible reaction in the markets simply because any changes have already been priced in.