Nonfarm Payrolls data is always a cause for heightened anticipation among both the media and the trading community, as the monthly number seems to be the most closely watched of the monthly economic indicators and based on that one would think it has great predictive powers for the markets. This is curious for several reasons:
1. Jobs data is a lagging economic indicator. To illustrate my point, ere is a chart of 15 years of Nonfarm payrolls data that captures the best 2 bull and bear markets :
- 15 year chart of Nonfarm Payrolls, Courtesy of Bloomberg
I’ve circled in red the 2 times the SPX index topped and began bear markets, and I’ve circled in green the 2 times the index bottomed and began new bull markets. Not surprisingly, the market topped when payrolls were strong, and bottomed when payrolls were weak. Because it’s lagging data. The market is forward-looking, and anticipated the subsequent fall or jump in the jobs data before the data was released. Over a long period of time, the general direction of the payrolls data holds value, but each month of data on its own is almost meaningless.
2. There is a large standard deviation in the data, meaning a difference of + or – 50k in the release is statistically noise. Unless the difference between the release and expectations is above 100k (which happens less than 25% of the time), the difference is statistically insignificant.
3. Subsequent revisions to the data, along with normal seasonal distortions and adjustments, are warning signs that the accuracy of the initial release is spotty at best.
Put it all together, and the hoopla over the jobs report is driven as much by the hyperactive news cycle and the media’s inability to put anything in a non Democratic vs Republican / who’s up and who’s down in DC framing. It’s just easier to get people fired up that way! The broad trend in payrolls data over a longer time frame has value, and obviously these numbers estimate real people who are getting hired or fired and THAT IS IMPORTANT, but each report on its own should be viewed with a good dose of skepticism for its predictive powers of larger themes.
Markets overnight:
- Chinese PMI data came out a touch weaker than expected, 50.4 vs. 51 expected, but the Shanghai index finished 1.4% higher, though the Hang Seng was flat. The rest of Asia was mixed.
- European equity performance is diverging again, as Spain is down 2%, almost flat on the year now, while most of Europe is higher. European PMI data came in better than expected on the whole, with Germany strong, and France weak
- SPX futures up 0.3%. The Euro is stronger, dollar mixed vs. other currencies. Treasury bonds a touch weaker, commodities mixed.
- Jobs data released at 8:30 am EST, along with UMich Cons Confidence at 9:55 am, and Construction Spending and ISM Manufacturing at 10:00 am.