One of the major themes we are going to hear discussed at length in the financial media in 2015 is the concept of deflation — a general decline in prices, often caused by a reduction in the supply of money or credit.

The European Central Bank (ECB) is worried about it, the Bank of Japan (BoJ) is worried about it. Plus, analysts and investors the world over are wondering how deflation could impact the U.S. stock market.

In other words, when consumers don’t have enough money in their pockets or access to enough credit, they tend to spend less, which leads to price declines, which leads to tighter margins for companies, which leads to less profitability, which leads to layoffs to boost profitability, which leads to more consumers with less money in their pockets, which ultimately leads back to contraction.

You can see why central banks, analysts and investors are so concerned about deflation. Nothing good happens in the stock market when the economy is contracting. That’s why we see the ECB and the BoJ taking such dramatic measures — lowering interest rates, buying sovereign bonds, etc. — to try and stave off deflation.

Interestingly, while the ECB and the BoJ may be loosening their monetary policies, the Federal Open Market Committee (FOMC) at the Federal Reserve is looking to continue tightening its monetary policy in 2015. But, why?

Many factors go into the FOMC’s decision-making process, but one of the most important is employment.

Employment numbers come in two forms: Non-Farm Employment Change and Unemployment data. Both ADP — a private payment processing company — and the Bureau of Labor Statistics (BLS) provide Non-Farm Employment Change data, but only the BLS provides Unemployment data.

ADP released its December 2014 numbers this morning and, once again, the numbers looked good. According to ADP, the U.S. economy created 241,000 new jobs in December, which caps off a year of strong job creation (see Fig. 1 below).

Fig. 1 — Change in Non-Farm Private Employment (Courtesy of ADP)

This means that there are 241,000 more people with more money in their pockets, which means they have more money to spend in the economy, which means the economy should continue to grow.

With numbers like these, the FOMC is now more concerned with inflation — a general increase in prices, often caused by an increase in the supply of money or credit — than deflation and is looking to take steps to combat it.

However, in doing so, the FOMC is forced to walk the tightrope of raising interest rates fast enough to prevent rampant inflation without raising them so fast that they stifle economic growth and bring on the next recession.

Seeing strong employment numbers makes it much easier to walk that tightrope because as long as more people are finding jobs, the economy is in a much healthier position to continue growing. That’s why the employment numbers are arguably the most important economic announcements of the month — behind any statements from the FOMC, of course.

We now have the ADP Non-Farm Employment Change numbers, and Wall Street seems to be pleased with what they see. The major stock indexes have all stabilized.

Now, we have to wait for the BLS Non-Farm Employment Change numbers — which don’t always match the ADP numbers — and the BLS Unemployment Rate to see if they confirm that the U.S. economy is still creating enough jobs to employ all those who are looking for work.

If the numbers are strong, it could be enough to push stocks higher even though geopolitical and economic concerns continue to swirl in Europe, Japan and elsewhere.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

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