This morning the U.S. non-farm payroll (NFP) numbers were released. If you are a long time reader of the financial press, you are likely quite familiar (perhaps too familiar) with the statistical release at this point: attention to payrolls follows a predictable accordion pattern. Little attention most of the time, then hyper-elevated attention immediately before and after the release. Here's Bloomberg's news headline analysis for 'Payrolls' over the past 12 months. I don't know about you, but I count 11 peaks (the 12th is not there because there's a 24-hour lag on this statistic).
Now you may be asking yourself why such a regular pattern persists... shouldn't the news be about, well, news? The date for the release is on a regular basis so its publication isn't itself a newsworthy development like, say, a natural disaster is. Rather, the outcome of the release is newsworthy, like, say, an election: the timing and occurrence of the news coming out is common knowledge, but the content itself is unknown.
But shouldn't the content be somewhat known? You may be wondering: 'Aren't there lots of super smart tweed-donning economics PhDs trying to divine the content of the release in advance? Aren't outrageous sums of money spent every year trying to refine our collective predictive ability? Shouldn't we be able to anticipate the results with rigorous accuracy?' My answers, respectively, are Yes, Yes, Eh. The resources poured into economic predictions have not tended to produce great results: that's why we get big 'surprises' so often. Friday's release was a surprise. Last month's release was also a surprise.
Investors pay attention to the news for two main reasons: impact on yields and impact on equities (both delivered through the primary topic of the release: labor market strength/weakness). I contend that while fixed income investor obsession over the NFP numbers may be a necessary evil*, equity investors would be best off reading NFP analysis for nothing more than entertainment value - it holds little predictive ability for equity indices, as indicated by the below regression of DJIA (NYSEARCA:DIA) returns against NFP numbers... the monthly release predicts a whopping 0.4% of the Dow's returns (R^2 = 0.0004). Wow. (An article with more regressions is coming soon, don't worry).
NFP data do a poor job of predicting the course of economic growth in the U.S. and an even worse job of predicting equities performance. Nevertheless, if you could divine the outcome of the NFP release, you could make serious bank trading the S&P 500 (NYSEARCA:SPY) and related indices on the day before the release.
The chart below should give you a good idea of just how bad last month's release was compared to expectations:
And as you might expect, that wasn't good for risk assets. SPX took a hit, down -0.84% in the first half hour of trading... that's bad, but it's not bad bad. The NFP surprise was over 5 standard deviations below the mean of 91 professional estimates... statistically (assuming normal distribution of NFP numbers, which I know, is a silly assumption - just bear with me), that shouldn't have happened. And this is a supposedly key gauge of the economy - economists spend a lot of time trying to predict it. But the peak to trough equities decline in response to what is a massively underwhelming result was -0.84% and the session ended down only -0.23%. NFPs matter, but I guess they don't matter that much.
Last month's and this month's NFP numbers make for a nice study in contrasts. Below is the BBG analysis of Friday's surprise, which was antipodal to last month's:
I guess markets react more positively to good news than they do negatively to bad news. Here is SPX:
Before I leave you, note one last interesting dynamic at play:
When non-farm payrolls indicate labor market strength (weakness), it predicts more robust (anemic) economic growth, which implies higher (lower) interest rates, which increase (decrease) the opportunity cost of gold (NYSEARCA:UGL) holdings - this holds especially true when you incorporate the risk-on/off dynamics of global hot money in response to NFP release surprises. Friday, this relationship was clear in haut-relief:
If there is a 'key takeaway' here, it is the following.
NFPs do move markets. But they are not the crystal ball that many take them to be - your local bartender may be just as good a predictor of NFP numbers as Morgan Stanley's team of economists. (Don't agree? Take a second look at the prediction histograms above.) If you're just a guy trying to grow your IRA or save for college, ignore every mention of NFP. If you're a fixed income trader, well, best of luck with your monthly BBG stare contest. NFPs are one gauge of one part of the economy. Try not to lose sight of that.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.