Employment growth is often overlooked as a driver of asset prices, yet it carries substantial predictive power. As a reflection of economic slack and labour market pressure, the pace of job creation influences inflation expectations, monetary policy, and financial conditions—key variables for equity and currency markets. Recent empirical evidence shows that employment growth, especially when measured relative to workforce expansion, can serve as a valuable input for macro trading strategies.
Why Jobs Data Matters More Than You Think
In macroeconomic terms, employment growth is a proxy for demand pressure in the labour market. When job growth outpaces the expansion of the working-age population, it signals tightening conditions. This typically leads to upward wage pressure, a shift toward less accommodative monetary policy, and greater sensitivity to inflation risks. For equity markets, this tends to be a headwind, as higher costs compress margins and policy tightening reduces risk appetite.
Conversely, weak employment growth often indicates slack in the economy, supporting easier monetary policy and, in turn, creating a more favourable environment for equities. Similarly, in foreign exchange markets, countries with stronger labour markets relative to their peers are generally better positioned for monetary tightening, making their currencies more attractive.
Measuring Employment Trends in Market Terms
To translate labour market dynamics into a usable signal, employment growth must be adjusted for demographic trends. A country with strong population growth will naturally require higher job creation to maintain equilibrium. The adjusted measure—“excess employment growth”—captures the degree to which job gains exceed or fall short of workforce growth. This adjusted figure provides a clearer indication of market-tightening or slackening pressures.
Data from the J.P. Morgan Quantamental System (JPMaQS), which incorporates real-time updates and revisions as they were known historically, provides the foundation for evaluating the predictive power of this metric across developed markets since 2000.
Employment Growth and Equity Performance
Analyzing the relationship between excess employment growth and major equity indices in developed economies reveals a consistent pattern: stronger-than-normal employment growth tends to precede weaker equity returns. This relationship reflects the expectation of tighter monetary policy and rising input costs that can erode profit margins.
A review of eight major equity markets—including the U.S., eurozone, Japan, and others—shows a persistent negative correlation between employment strength and equity futures returns. Though modest in size, this inverse relationship has held across different time frames and market cycles.
When converted into a simple trading signal, excess employment growth provides a modestly accurate predictor of return direction. While the signal does not exhibit a strong long bias and thus underperforms in bullish environments, it shines during economic downturns. A naïve portfolio constructed using this signal—assuming monthly rebalancing and capped z-scores to avoid concentration—produced a Sharpe ratio of 0.6 over two decades, with very little correlation to the market benchmark. When blended with a standard long-equity strategy, the combination significantly boosted the overall Sharpe ratio.
Labour Markets as Currency Catalysts
In foreign exchange, relative employment strength offers even more compelling results. Countries that outpace their counterparts in job creation tend to see stronger currencies. This reflects both anticipated interest rate differentials and perceptions of economic resilience.
Focusing on eight developed market currencies and their key benchmarks (primarily USD and EUR), the relative employment growth signal has maintained a statistically significant positive correlation with forward FX returns. The relationship held across multiple decades, showing its robustness through varying global conditions.
A hypothetical FX trading strategy based on this signal, rebalanced monthly and adjusted for volatility, produced a Sharpe ratio of 0.7 and a Sortino ratio above 1. The strategy demonstrated little correlation with equity markets, making it a potential diversifier in broader macro portfolios.
The Strategic Implications
Employment data is among the most timely and widely watched macro indicators, yet its medium-term predictive potential is often underutilized. While market participants focus on short-term surprises, longer-term trends in employment relative to workforce growth provide insight into future policy direction and asset performance.
Incorporating labour market dynamics into macro trading frameworks—either as a stand-alone signal or in conjunction with carry and valuation measures—can help identify inflection points in both equity and currency markets. The evidence suggests that even simple, unoptimized signals based on jobs data can improve risk-adjusted returns and enhance portfolio resilience across economic cycles.
As the global economy continues to shift and monetary policy tightens in response to inflation pressures, employment growth may once again become a leading indicator worth watching—not just for economists, but for traders too.
