The post NFP story intrigues: This number was undoubtedly strong to anyone who read it (Rick Santelli excepted).

Unemployment is trending downwards; revisions are positive; the average workweek ticked up 0.1 hours; average hourly earnings rose 4 cents (0.2%). And unlike last month, the labor force participation rate (64.0%) and the employment-population ratio were unchanged. This means that the Unemployment Rate actually improved in December, unlike November, when it only appeared to improve.

There are seasonal reasons for the positive data — and they may fade by Q2. But for now, we must operate with the facts in front of us, and they are that Employment data is trending upwards.

What will the fallout from this be? Consider these three aspects:

• Federal Reserve: Has been watching the labor market closely. While the private sector is clearly improving, it is no where  near what is necessary for the Fed to remove its accommodation (glorious free money) or end ZIRP soon.

The key for the Fed is not Employment, but rather inflation. They are likely expecting inflation will remain subdued even if employment improves substantially and wages tick up. Between consumer  deleveraging, mortgage overhang, and capacity under-utilization, they seem to believe inflation is years away.

• Politics: The biggest challenge to any incumbent President is National Security, then the Economy. Following the termination of Bin Laden, Barack Obama needs only a modest improvement in the Economy to last until late Summer to lock up re-election. (I’ll dig up some long term approval/disapproval ratings and post later)

As we noted above, that is far from a sure thing. ECRI’s recession call could be right (their track record is outstanding); this uptick could be merely due to temporary seasonal factors. However, this report could very well change the tone of the campaign season. These improvements are on the verge of becoming an actual trend — one or two more good NFP reports and the Presidential election, fight to retain the Senate, and campaign to expand control over the House could get very interesting. And that has huge potential repercussions for:

• Markets: I have long since argued that politics and investing should not be intermingled. However, I am in the minority on this, and in order to get some further context, we need to consider Keyne’s Beauty contest: Its not what I think, but what the crowd believes.

Let’s do a quick thought exercise: Based upon some of the more vociferous complaints, when it comes to Markets, the Incumbent is anti-business, anti-growth, pro-tax, pro-regulations, yadda, yadda, yadda.

We do not know everyone’s collective opinion — but there is certainly a vocal subgroup saying that. If that is the crowd’s dominant beliefs and expectations (regardless of accuracy), and if it is acted upon (a big if), it could matter a great deal to trading.

Regarding issues of taxation, regulation, health care, etc., there exists a possibility of improving economic data being a negative for the markets — at least for the short term.

The bottom line remains thus: The Employment data continues to improve; perhaps it becomes problematic later on, but the overall trend is positive. The Fed’s policies are unlikely to change at least for the next 2 quarters. Yes, I am aware of their “promise,” but that can change very quickly if inflation returns. Lastly, the political ramifications can have an impact on markets, we will see what the rabid Pro and Anti voters do with their money.

This post originally appeared at The Big Picture and is posted with permission.