Trading the News: Non-Farm Payrolls November 2006
For the second month in succession
the headline Non-farm Payrolls (Non-Farm Employment Change) figure
was overshadowed by revisions to previous months’ data. We
take a closer look at the price action and the reasons why traders
reacted the way they did.
First, the Figures
If you cast your minds back to last month (or
take a look at our account of the October
2006 report) you will remember that the headline figure was
much worse than expected. However, monthly revisions to the data
from August, a better than expected unemployment
rate and annual Non-Farm Payroll revisions (very few were
aware of these annual revisions) overshadowed the headline data.
To be honest this is fairly rare because the headline figures
generally take centre stage but it was a good example of why
traders should pay attention to all data releases and be aware
of any potential conflicts that may arise. For example, strong
revisions to previous data conflicted with September’s
poor headline figure.
After hearing that it is fairly rare for the headline figure
to be ‘out-influenced’ you may be surprised to read
that the same occurred with the November report. We had further
revisions to the August data from 188K to 230K. There was also
a revision to September’s data; the extremely low figure
of 51K was revised up to 148K. The unemployment rate was a further
surprise coming in at 4.4%, a five year low! This positive data
was enough to offset the disappointing headline figure of 92K versus
expectations of 125K.
Price Action
By all accounts the price action caused by the November report
was very similar to what we saw last month. As you would expect
the headline figure is released a fraction of a second before
any of the revisions, this caused a rapid spike higher in the
EURUSD rate. We have a screenshot for you in the 1-minute time
frame to show you just how quickly this move took place.
Click
here to enlarge EURUSD 1min
Some Simple Economics
Why does positive employment data influence
the foreign exchange market the way it does? Basically individuals
with jobs have a greater amount of disposable income than those
who are unemployed. If the unemployment rate falls it means that
more people have disposable income to spend on consumer products
and services. This creates an increase in demand that causes inflationary
pressure on prices. At the same time companies expand their operations
to meet the increase in demand but they now have a smaller pool
of labour to choose from. This means that it costs more to hire
and train the right staff, again causing inflationary pressure.
The FOMC attempt
to control inflation and keep it at a healthy rate so the US economy
does not boom only to burn itself out and head into a crippling
recession. To control inflation the fed uses interest rates. If
inflationary pressure increases beyond the Fed’s threshold
then they will raise interest rates thus making the dollar more
attractive. At the time of writing the FOMC isn’t expected
to raise interest rates further until mid 2007. However with encouraging
employment data and the basic economic understanding that it will
cause inflation you can see why there was such a strong demand
for dollars post Non-Farm Payrolls.
