Traders nervous ahead of US jobs data today

New York: The difference between a market rally and a rout on Friday will hinge on the US government’s latest report on unemployment in the country. The 5 July release delivers a read on conditions in the labour market - a key piece of data used to gauge when the Federal Reserve might begin tapering its bond-buying program.

Traders are nervous as Friday’s release of employment figures for June is the first jobs report since 19 June when Federal Reserve Chairman Ben Bernanke roiled investors with talk of a pullback in monetary stimulus. Bernanke for the first time offered a timeline for winding down the Fed’s $85 billion-a-month bond buying program later this year and ending it altogether by mid-2014. That sent a chill through global markets, including India as it signaled the end to easy money.

The Fed’s plan for unwinding its bond-buying program is based on optimistic new economic forecasts for next year, including a projection that the jobless rate, which was 7.6 percent in May, will fall to 6.5 percent by end-2014.

Economists surveyed by Dow Jones Newswires expect that the US added 160,000 jobs in June, taking the unemployment rate down to 7.5 percent. But a swing of 50,000 jobs could have broad implications.

“Any number between 150,000 and 175,000 is a nonevent,” Ethan Harris, co-head of global economics at Bank of America Merrill Lynch told The New York Times. “Anything over 200,000 would get people really concerned about a Fed exit, while a really weak number would force everyone to rethink if the economic recovery is going well. So no news is good news.”

If the economy created significantly more positions, the strong numbers would increase the odds that the Fed will begin to taper its bond purchases aimed at stimulating the economy. That would be a negative for global stocks including the Indian bourses, which have benefited from the flood of money into the financial system.

A weaker-than-expected figure could increase pressure on the Fed to maintain its current program of bond buying, which would be seen as positive for the stock and bond markets.

Stock markets have soared for three years under Bernanke’s program and analysts are expecting market volatility and a sell off when the Fed announces a firm date for scaling back the purchases. The Fed chief was given the “Helicopter Ben” moniker during the financial crisis when he suggested dropping money from a helicopter to fight deflation.

The US central bank has added over $3 trillion of monetary stimulus to the economy and over $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy. Part of the stock market rebound from the March 2009 lows is based on market fundamentals, but a big chunk is courtesy Helicopter Ben.

The Fed’s $85 billion-a-month bond-buying program, known as quantitative easing, was aimed at spurring the US economy, but for years now it has also had the effect of sending waves of inflows into high-yielding emerging markets like India. An end to US monetary stimulus could lead to portfolio outflows, pushing the rupee lower and, in turn, delaying any rate cuts from the Reserve Bank of India.

The Indian markets have been bruised in the last few weeks, as the expected pullback in Fed stimulus caused foreign institutional investors (FII) flows to dry. FIIs have sold index futures worth $142.70 million in the previous two sessions, as per exchange and regulatory data. They also sold cash shares worth $116.98 million on Wednesday.