The NFP and The Markets

The Non-Farm Payroll and Unemployment Reports are considered by most economists to be about the most important economic indicators, and certainly, their immediate aftermath creates a high level of volatility. However, as any trader will tell you, a consistent trend is much easier to profit from than immediate short term movements, so let’s look at the numbers and see if they truly are a help in this regard. The answer will probably surprise you.

As currency traders we of course look at the dollar’s movements but remember, the S&P 500 has a huge amount of influence over where the dollar is going. Actually, the dollar’s relationship with equities is rather a chicken and egg affair-either one can definitely drive the other given the right set of circumstances. For example, the stock market crash which ensued after the Lehman bust last September certainly helped drive the dollar far higher against the higher-yielding currencies while Bernanke’s infamous “electronic printing” comments during his March 15 60 Minutes interview helped push it in the opposite direction and spark a rally in equity markets.

What it really comes down to is investor’s appetite-or lack thereof-for risk. When the investors are risk-averse they move into the dollar and Treasuries as they move away from stocks and commodities while the acceptance of risk has the exact opposite effect. So the real question we need to answer is what if any effect the NFP has on investor’s risk tolerance.

First, the unemployment rate has followed a consistent pattern; it’s worsened each month at a level about as expected. The only exception has been in July when the 0.1 percentage point increase was less than expected. That’s significant because of the way unemployment is measured; workers who are not actively looking for work are not counted in the headline unemployment rate but as they re-enter the job market, they are.

Over January and February, the markets were in risk-averse mode; the S&P 500 lost 9.03% and 10.69% while the dollar index gained 5.46% and 2.53%. The NFP, while certainly bad, was basically about as expected in both reports. In March, the amount of jobs lost continued to worsen but the number was better than what the market was looking for. The S&P gained 9.36% while the dollar index fell 2.92%. The April loss of jobs worsened about as expected as the S&P gained 10.52% and the dollar index fell 0.94%. The tide turned in May when the loss of jobs declined for the first time, beating market expectations. The S&P gained 5.21% while DXY fell 6.22%. The June loss of jobs was far better than expected while the S&P was basically flat and the dollar gained 0.84%. Finally, in July the job loss was far worse than the market was looking for, but he S&P still managed to gain a very healthy7.22% while the dollar fell 2.27%.

The only conclusion that I can draw from the numbers is that the NFP itself is actually a poor predictor for market risk tolerance over the subsequent month, with the proviso that the market is betting that job losses peaked in April at -663k. It seems to be that the unemployment rate carries more weight with investors, especially given what happened in July when stocks rose when the loss of jobs accelerated as the unemployment rate grew less than expected.

Meanwhile, the latest data on unemployment claims shows a decidedly mixed picture when you look a bit deeper into the data. The number of people continuing to claim benefits rose by 69,000 to 6.31M while the 4-week moving average decreased by 148,500 to 6.427M. Economists prefer to use the 4 week averages in this series because they smooth the data however, the number of workers continuing to claim benefits will fall as they run out unemployment insurance, which is happening now.