How the US jobless data could affect the markets

ONCE a month, the US non-farm payrolls are released. They typically bring a bout of volatility to many asset prices – a move that is widely welcomed by derivatives traders, who have at times found themselves contending with relatively flat markets. The number is usually released on the first Friday of the month – the stats for November will come out on 7 December – and, perhaps critically, analysts frequently struggle to get forecasts that come close to the final figure.

The actual readings can easily be 50 per cent higher or lower than consensus estimates. This means that, unlike more obvious headline figures – like central bank decisions on interest rates – the market frequently hasn’t accurately priced in the result before it happens. The upshot is that, when the number is released, there’s often a frenzy of activity as traders adjust positions to react to the news, presenting some healthy short-term trading opportunities.

So which assets tend to give a clear reaction to the payrolls? The number breaks at 8.30am Eastern Standard Time – a full hour ahead of the start of physical trading on Wall Street. But futures markets are open through the night. As a result, having exposure to and being able to trade the Dow or the S&P 500 becomes a real possibility. The classic situation, however, is that the market frequently seems to overreact. It’s imperative that you’re aware of this. Otherwise, if you get in too late, you may find yourself on a losing position from the outset.

The US economy is the world’s largest consumer of crude oil, so it’s unsurprising that oil prices react quickly to any insight into the health of the nation. More people at work means more production, more distribution and higher demand for oil.

The dollar basket can be another good play. Granted, you could use another dollar cross – maybe dollar-Canadian dollar. But the risk is that, if you use a currency pair, an event that hits the other currency at a similar time to the payrolls being released could override the reaction you’re hoping to trade. A better than expected payroll reading is good for the US economy; tax receipts rise, borrowing falls and the dollar enjoys some added popularity across the board as a result.

Gold is one of those classic safe haven plays that investors will often run to if things don’t go quite as planned. Again, the correlation is simple. If the payrolls beat forecasts, some on the margins will look to sell gold and move into more risky assets. Conversely, a shock on the other side – with a far worse than expected print – would likely see gold appreciate.

So what about Friday’s upcoming reading? The payroll figure is calculated from what is known as a reference week in the preceding month – it’s the week that includes the 12th of the month. This month’s figure will be a week after Hurricane Sandy hit the North East corner of the US.

Unfortunately, that’s likely to be too early to register any impact from the rebuilding efforts that come off the back of the disaster. And with infrastructure disruption taking some time to resolve, this will likely depress the figure further. When looking at the post-Sandy effect, the initial jobless claims, released weekly, indicated for the week ending 10 November that 90,000 more workers claimed unemployment than the previous week. In addition, some business owners may have followed through on their promise to lay off workers if Barack Obama was reelected. This means that an already uncertain figure will be prone to even greater variance this time round.

Even if the print is bad, there won’t necessarily be a negative reaction. One piece of the puzzle is the consensus heading in to the event. All the research firms are resolutely aware of the post-Sandy/ election effect, and the consensus could be easily cleared if the bar is set low. Even a negative figure can be a good thing – if it beats forecasts.

Register for GFT’s Live Market Analysis webinar, covering non-farm payrolls, at 1pm on 7 December at www.gftuk.com