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007 on the Wall Street

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A higher unemployment rate is bad for the stock market but good for the bond market

Siva Nara
Priya Raghavan

"Mr Bond, your services for Her Majesty's Secret Service are no longer required," M declared.

James Bond pleaded, "You can't be so cruel to me."

She whispered, "Okay, then. On the first Friday of every month, around 8-28 a.m., it seems, hundreds of traders, both in Chicago and New York, are hooked on to the CNBC channel. They watch the telly, without even blinking. I need to know what is going on."

007 reluctantly agreed, knowing pretty well that he cannot exercise his licence to kill for this job.

A stunning beauty, dripping wet in the pouring rain ran towards him, a coffee shop in downtown Manhattan.

The ever-suave Bond invited her for a cup of coffee.

Ursula gushed, "Talk about a perfect opportunity for the traders to make millions in a few seconds. They should be dissecting the report that is about to be released in the next couple of minutes."

Bond asked, "What report?"

EMPLOYMENT, THE KEY

Ursula said, "The Employment Report. It is released by the Bureau of Labour Statistics, Department of Labour. It is one of the key economic indicators that can make a significant impact in the bond, equity and currency market. The health of the economy can be easily interpreted from this and one can determine whether the country is going into recession or getting better."

"Do you know why a higher employment rate is good for the stock market but bad for the bond market?"

On seeing a suspicious-looking person in the corner of the restaurant, Ursula said goodbye and vanished. Bond, sensing trouble, left the restaurant. His only possession was a Mac and not a machine gun.

On entering his hotel room, he was shocked to hear a voice. Spotting Ursula, he said, "Thought we would never meet again."

"Never say never again, Mr Bond. I followed you. You know a lower unemployment rate is good for the country but it results in higher inflation. A higher inflation results in higher prices for ordinary goods making affordability more expensive. To control inflation, the Federal Reserve has to increase the interest rate. An increase in the interest rate would make the existing treasury yields higher, thus causing a panic in the bond market. So, a higher unemployment rate is bad for the stock market but good for the bond market.

"Also, do you know that unemployment could be caused not by lack of economic growth but because a company might decide to offshore their services than doing it in-house?"

Bond joked, "I am wondering when my job is going to be outsourced to Bangalore. Dell decided to offshore 20,000 jobs, which means companies intend making more profits by cutting their staff in US. I guess this results in an increase in corporate profits, which leads to higher share prices.

"Yes," said Ursula. "But, there is also another important factor. The monthly change in non-farm payroll reflects the change in the number of new jobs created. The change includes positions in the government sector too. Thus, if the change reflects that more than 20,000 jobs were lost last month, it does not mean that the economy is in trouble. It could be because the government might have laid-off 80,000 people but the business community may have increased the labour force by 60,000. They were interrupted by a waiter who resembled the stranger at the restaurant. Again, the girl abruptly left him but not before suggesting, "Read my messages carefully."

SECRETS OF SURVEYS

Bond browsed his office desk in the hotel room, and saw two covers marked, "For your eyes only''. As he finished reading them and tossed the papers, everything turned dark suddenly. He opened his eyes to see two evil-looking men staring at him. They said, "Haven't you done enough snooping and gotten in and out of trouble? What do these secret reports Household Survey and Establishment Survey mean? Explain or else you might not Die another day, but today.

Bond smiled, "Gentlemen, relax. Household Survey is one of ways to measure the employment data. Every month, the Bureau of Labour Statistics, Department of Labour, sends request to more than 60,000 households asking various questions regarding their employment situation. The Department receives responses from almost 95 per cent of the households. From this data, the department finds the percentage of people unemployed and calculates the unemployment rate for the country.

"Even though this method of finding data reflects the health of the economy, it does not reflect the entire picture of the business community. Thus, the Bureau of Labour Statistics gets in touch with more than 400,000 businesses to get more information. This is known as `Establishment Survey'. A variety of business communities are polled for various questions regarding the number of new people hired and the salary figures for the jobs on an hourly basis, etc.

"The major difference between the two surveys is that in the Household Survey, both farm and non-farm labours are included; the self-employed, domestic help people are also included and the data comes from individuals.

"In the Establishment Survey, the data come directly from corporations; only non-farm labours are included. So, it reflects the health of the economy much better.

While untying Bond, one of the villains remarked, "Either the Russians or Icelanders must have brainwashed you pretty bad."

Bond smirked, "One of the key factors from these surveys is the number of new jobs reported from the previous month. Also, another indicator is the change in the hourly wages paid to the labour. If the country is getting better, then the number of newly-created jobs being reported would be higher along with higher wages. If more number of people are employed, then the unemployment rate would be lower, which is good for the stability of the country.

"Not only that, if more jobs are created, then the affordability of the people would be higher and thus many businesses would be able to achieve better results, yielding better results for the corporate earnings. This would cause an increase in the stock market returns, as more and more people would be able to invest in the equity market."

One of the villains did not believe this, "You don't fool anyone. My supercomputer here tells me that the Household Survey contradicts the data from the Establishment Survey."

CONTRADICTIONS EXPLAINED

Bond said, "That is very common. The Household Survey may actually report higher employment data with more people having jobs, whereas the Establishment Survey might report fewer people being hired or more people being fired. That is because the Household Survey includes farm payroll and self-employed along with domestic help. The establishment Survey does not include any of these and just reports the newer jobs created by the company. Thus, there could be a higher demand from the farming industry but lesser demand from the business community like technology and retail.

"Anyone who wishes to place his trade based on the data has to be really professional as the impact of the news sometimes may last 15 minutes and some other times 15 days too. A trader has to be very knowledgeable before making a decision on how to react to the numbers."

Bond was freed. M was waiting at the airport.

M asked, "Would you like another assignment to find out how lower unemployment rates would affect the currency market?"

Bond's parting shot was: I might have been shaken by the enormity of this job, but certainly not stirred."

The authors are publishers of www.wisepen.com

Racy@TheHindu.co.in

(This article was published in the Business Line print edition dated April 17, 2006)
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