Fundamental analysis Macroeconomic indicators

Nonfarm Payrolls: Estimating the Strongest Economic Indicator

Elena Berseneva 08 february 2022 185 3

Among traders who use fundamental analysis in their trading, it is impossible to meet somebody who is unaware of the Nonfarm Payrolls reporting indicator (or just Nonfarm, in colloquial slang).


This indicator reflects changes in the number of employed workers in the U.S. non-agricultural sector. In the trader’s environment, its publication is viewed as one of the most significant events that causes great volatility in financial markets.


In one of our articles, we considered the influence of employment and unemployment indicators of the world’s major economies on the dynamics of currencies of these countries. Among them, we estimate the influence of Nonfarm Payrolls in comparison with analogical indicators of other countries.


Now we suggest focusing only on Nonfarm Payrolls and expanding on its influence.


Hypothesis
To conclusion

Positive changes in U.S. employment cause growth of the U.S. currency rate with respect to other currencies, and also strengthen instruments of the US stock market.

To conclusion
Data used

The historical values of Nonfarm Payrolls:

  • For the analysis, we take the maximum accessible history of values of this indicator – 49 years (since January 1970). It contains 590 values, the publication of which influences changes in quotes of financial instruments.


The historical values of quotes of financial instruments for the same period in our study are represented by:

  • six currency pairs incorporating the US dollar,
  • futures for Dow 30 and S&P 500;
  • 30 U.S. stocks comprising the Dow Jones Industrial Average index.


In the obtained sample, we have 15 916 cases when the published values of Nonfarm Payrolls influenced various financial instruments.

Financial instruments used in the analysis:


Financial instruments
The history of the indicator, years
The number of publications
1
EURUSD
39
473
2
GBPUSD
39
473
3
USDJPY
31
375
4
USDCAD
37
449
5
USDCHF
31
375
6
AUDUSD
39
473
7
S&P500
17
205
8
Dow30
39
470
9
3M Company
39
470
10
United Technologies
22
264
11
Apple
38
461
12
American Express
36
426
13
Bank of America
39
470
14
Walgreens Boots
23
276
15
Boeing
39
470
16
Caterpillar Inc
39
470
17
Coca-Cola
39
470
18
Cisco
29
351
19
Citigroup
33
391
20
Coldman Sachs
39
470
21
Exxon Mobil
39
470
22
Home Depot
38
452
23
Intel
39
470
24
J&J
39
470
25
JPMorgan
39
470
26
Merck & Company Inc
39
470
27
Microsoft
33
398
28
IBM
38
462
29
NVIDIA
20
244
30
Oracle
33
398
31
Pfizer
39
470
32
Procter & Gamble Company
39
470
33
UnitedHealth
35
415
34
Verizon
36
426
35
Visa
11
134
36
McDonalds
39
470
37
Walt Disney
39
470
38
The Travelers
39
470
Total
15 916


Before we move on to our main calculations, we estimate the difference between the daily volatility on the day of publication and the volatility for the preceding week and three weeks.



The average daily volatility of the currency pairs, %



The currency pairs
On the day of publication
For the preceding week
For the preceding three weeks
EURUSD
1.12
0.98
0.96
USDCAD
1.01
0.97
0.92
AUDUSD
1.31
1.29
1.22
GBPUSD
1.10
0.95
0.92
USDCHF
1.09
1.04
0.98
USDJPY
0.98
0.99
0.94
Average value
1.10
1.04
0.99



The average daily volatility of the instruments of the US stock market, %


Financial instrument
On the day of publication
For the preceding week
For the preceding three weeks
3M Company
1.79
1.80
1.81
United Technologies
2.12
2.15
2.15
American Express
4.06
4.16
4.05
Apple Inc
3.27
3.26
3.23
Walgreens Boots
1.94
1.96
1.96
Bank of America Corp
2.46
2.43
2.46
Coca-Cola
1.62
1.65
1.62
Boeing Co
2.30
2.30
2.31
Caterpillar Inc
2.32
2.30
2.32
Coldman Sachs
2.00
2.00
1.99
Cisco Systems Inc
3.09
3.13
3.10
Citigroup Inc
2.80
2.80
2.81
Intel
2.83
2.85
2.85
Exxon Mobil Corp
1.81
1.83
1.82
Home Depot Inc
2.49
2.47
2.50
The Travelers
2.93
2.92
2.92
Johnson & Johnson
1.80
1.74
1.80
JPMorgan
2.51
2.49
2.47
Merck & Company
2.01
2.03
2.01
Microsoft Corporation
2.55
2.52
2.57
IBM
4.14
4.21
4.16
McDonalds
2.55
2.58
2.54
NVIDIA Corporation
4.41
4.33
4.36
Oracle Corporation
3.57
3.61
3.58
Pfizer Inc
2.14
2.13
2.15
Procter & Gamble Company
1.72
1.73
1.73
UnitedHealth
2.95
3.04
2.93
Verizon Communications Inc
1.90
1.95
1.92
Visa Inc Class A
2.14
2.19
2.15
Walt Disney
2.34
2.31
2.33
Dow 30
1.37
1.37
1.36
S&P 500
1.24
1.26
1.24
Average value
2.47
2.48
2.47


As indicated in the obtained results, the volatility of currency pairs on the day of publication of the indicator increases by 6% in comparison with the volatility of the preceding week, and by 11% in comparison with the average volatility for athree-week period. The volatility of the stock market remains almost unchanged.


Now we will turn directly to the influence of the published indicators of Nonfarm Payrolls on changes in quotes of financial instruments.


As the first assessment of the influence, we consider values of the correlation coefficient between changes of the Nonfarm value and changes in the quotes of a financial instrument.



As the second assessment of the influence, momentum (m) determination will be included in our calculations. We will calculate the momentum using the following formula:


m (%) = Σ P(%) / n,


where:

  • n is the number of Nonfarm publications;
  • P (%) is the increment rate of thequote of afinancial instrument while we consider the increment as positive if its sign and the sign of changes of the Nonfarm value are the same.



So, for example, if the Nonfarm Payrolls value increases and the USDCAD currency pair growths, we obtain the positive momentum which is equal to a value of an increment of a financial instrument.


In a similar fashion, we can estimate the momentum for the reverse situation: if the Nonfarm indicator and the quote of a financial instrument decrease, we again obtain a positive momentum since their movements are unidirectional. If their increments are multidirectional, the momentum will be negative.



We take several time periods within which we will make the assessment:


Friday, the day of publication
The time period between the opening and closing of Friday, the publication day of Nonfarm
The following Monday
The time period between the opening and closing of the first Monday after publication on Friday
3 days since the date of publication
The time period between the opening of the first Monday after publication on Friday and the closing of Wednesday
1 week since the date of publication
The time period between the opening of the first Monday after publication on Friday and the closing of the following Friday (5 trading days)
2 weeks since the date of publication
The time period between the opening of the first Monday after publication on Friday and the closing of the second Friday (10 trading ideas)
3 weeks since the date of publication
The time period between the opening of the first Monday after publication on Friday and the closing of the third Friday (15 trading days)



Let us see the results for the currency pairs.



The correlation coefficient


Financial instrument
Friday
The next Monday
3 days since the date of publication
1 week since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
EURUSD
0.121
-0.071
-0.051
-0.052
-0.016
-0.023
GBPUSD
0.182
-0.178
-0.042
0.026
-0.048
-0.019
USDJPY
0.143
0.040
0.070
-0.016
0.008
0.012
USDCAD
0.022
-0.151
-0.160
-0.068
0.005
-0.027
USDCHF
0.134
-0.079
-0.032
-0.090
-0.040
-0.005
AUDUSD
0.111
-0.073
-0.151
-0.109
-0.040
-0.029
The average for the whole basket of USD
0.119
-0.085
-0.061
-0.051
-0.022
-0.015



Momentum, %


Financial instrument
Friday
The next Monday
3 days since the date of publication
1 week since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
EURUSD
0.044
-0.016
-0.069
-0.005
-0.035
-0.005
GBPUSD
0.060
-0.041
-0.367
-0.108
-0.408
-0.580
USDJPY
0.098
0.031
-0.025
-0.086
-0.074
-0.043
USDCAD
-0.035
-0.017
-0.061
0.001
-0.084
0.102
USDCHF
0.064
-0.017
-0.005
0.024
0.000
0.041
AUDUSD
-0.010
-0.051
-0.192
-0.184
-0.115
0.006
The average for the whole basket of USD
0.037
-0.019
-0.120
-0.060
-0.091
-0.080


As indicated in the tables, the US dollar in the currency pairs moves in line with employment changes predominantly on Friday, which is on the publication day for Nonfarm. In the following periods, the US dollar “kicks” back.


We will approach this situation from another point of view. We calculate values of momentums depending on the distribution of the published indicators away from the value of the standard deviation. We take a period of 6 preceding months to calculate the standard deviation.



Currency pairs. The values of momentums depending on the value of the deviation, %


Group
Friday
The next Monday
3 days since the date of publication
1 week since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
More than standard 1 deviation
(in the positive direction)
0.042
-0.037
-0.041
-0.144
-0.262
-0.323
Within one standard deviation
0.029
-0.005
-0.137
-0.107
-0.026
0.052
More than 1 standard deviation
(in the negative direction)
0.053
-0.040
-0.139
0.135
-0.125
-0.071

Here, we can observe the same situation with predominantly positive momentums of Friday trading and negative momentums in the following periods under our consideration. While the greatest negative momentums are indicated for the values of changes of employment within one or more standard deviations. This situation is characteristic of the period from 2 to 3 weeks after data publication. In other words, the market starts a strong movement “against” the published values of employment.



Now let us look at the reaction of the stock market to Nonfarm Payrolls publications.



The correlation coefficient


Instrument
Friday
The next Monday
3 days since the date of publication
1 week since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
3M Company
-0.010
0.058
0.083
-0.010
0.006
-0.042
United Technologies
-0.161
0.011
0.028
-0.078
-0.096
-0.034
American Express
-0.014
0.087
0.093
0.073
0.045
0.041
Apple Inc
0.042
-0.045
-0.012
-0.026
0.011
-0.044
Walgreens Boots
0.138
0.052
0.146
0.094
0.038
0.063
Bank of America Corp
-0.038
-0.059
0.066
0.048
0.022
-0.007
Coca-Cola
-0.101
0.065
0.006
-0.003
0.084
0.024
Boeing Co
0.002
-0.049
0.045
0.072
0.107
0.050
Caterpillar Inc
0.007
0.048
0.030
-0.002
0.042
0.039
Coldman Sachs
0.046
0.055
0.062
0.023
0.091
0.035
Cisco Systems Inc
0.010
0.104
0.060
-0.026
0.002
0.034
Citigroup Inc
0.199
0.211
0.095
0.048
-0.046
-0.012
The Travelers
0.081
0.098
0.104
0.026
0.065
0.020
Exxon Mobil Corp
0.072
0.020
0.015
-0.009
0.063
-0.033
Home Depot Inc
-0.045
0.153
0.098
-0.014
0.016
-0.091
Intel
-0.016
0.022
0.003
-0.021
0.002
-0.008
Johnson & Johnson
0.056
0.050
0.058
-0.022
0.003
0.004
JPMorgan
0.103
0.028
-0.002
-0.036
-0.005
-0.063
Merck & Company
0.047
-0.011
-0.013
-0.086
-0.060
-0.013
Microsoft Corporation
-0.005
0.018
-0.026
-0.029
0.037
0.021
IBM
-0.011
0.017
0.074
-0.015
-0.059
-0.006
McDonalds
-0.008
0.090
0.075
0.044
0.025
-0.030
NVIDIA Corporation
0.010
0.155
0.036
0.005
0.049
0.039
Oracle Corporation
0.043
0.056
0.039
0.027
0.051
0.050
Pfizer Inc
0.001
0.012
0.008
-0.034
-0.049
0.033
Procter & Gamble Company
0.061
0.118
0.097
-0.012
0.003
0.027
UnitedHealth
-0.022
0.063
0.037
-0.038
-0.115
-0.077
Verizon Communications Inc
0.033
0.068
0.144
0.073
0.072
0.066
Visa Inc Class A
-0.115
0.016
0.176
0.129
0.167
0.082
Walt Disney
0.156
-0.040
0.088
0.093
0.044
0.057
S&P 500
-0.044
0.157
0.172
0.083
0.075
0.103
Dow 30
0.035
0.080
0.041
-0.022
0.032
-0.003
Average value
0.017
0.053
0.060
0.011
0.023
0.010



Momentum, %


Instrument
Friday
The next Monday
3 days since the date of publication
1 week since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
3M Company
0.039
0.024
0,029
-0,094
0,121
0,001
United Technologies
-0.186
0.120
0,199
0,030
-0,038
0,949
American Express
0.075
0.170
0,136
0,312
0,438
1,039
Apple Inc
0.115
0.033
0,172
0,280
0,553
0,662
Walgreens Boots
0.101
0.070
0,021
0,030
0,031
0,154
Bank of America Corp
-0.011
0.036
0,240
0,193
0,330
0,311
Coca-Cola
-0.012
0.046
0,089
-0,014
0,368
0,301
Boeing Co
0.100
-0.020
-0,183
-0,135
0,256
0,330
Caterpillar Inc
0.080
0.031
-0,094
-0,069
-0,012
0,189
Coldman Sachs
0.015
0.036
0,022
0,029
0,229
-0,054
Cisco Systems Inc
0.171
0.151
0,174
0,140
0,233
0,154
Citigroup Inc
0.052
0.216
0,177
0,086
-0,168
0,102
The Travelers
0.131
0.042
0,175
0,091
0,783
0,459
Exxon Mobil Corp
0.083
0.025
-0,040
-0,040
0,310
-0,033
Home Depot Inc
0.026
0.116
0,188
0,013
0,512
0,010
Intel
0.014
0.018
0,085
0,200
0,331
0,824
Johnson & Johnson
0.065
0.028
0.145
0.176
0.595
0.554
JPMorgan
0.065
0.059
0.053
0.082
0.044
0.308
Merck & Company
-0.031
0.070
0.024
0.003
0.384
0.590
Microsoft Corporation
0.071
0.016
0.098
0.040
0.515
1.009
IBM
0.099
0.278
0.503
0.508
0.143
1.271
McDonalds
0.028
0.113
0.013
0.033
0.291
0.077
NVIDIA Corporation
0.089
0.396
0.637
1.009
1.407
2.113
Oracle Corporation
0.205
0.178
0.155
0.244
0.987
1.005
Pfizer Inc
0.033
0.017
-0.049
-0.122
-0.126
0.171
Procter & Gamble Company
0.083
0.131
0.144
-0.016
0.211
0.251
UnitedHealth
0.016
0.001
0.136
0.149
0.177
0.231
Verizon Communications Inc
-0.037
0.052
-0.062
-0.108
0.181
0.238
Visa Inc Class A
0.038
-0.001
0.351
0.378
0.356
0.816
Walt Disney
2.216
0.017
0.074
0.107
0.168
0.362
S&P 500
0.020
0.061
0.067
0.072
0.133
0.248
Dow 30
0.061
0.047
-0.043
-0.017
0.138
0.197
Average value
0.119
0.081
0.114
0.112
0.309
0.464


In general, for stock instruments the reaction of the market employment data publications on employment has a more explicit positive correlation. But here one has to bear in mind a very important point: stock indices and the stocks they include tend to grow by their financial nature. While from a historical perspective, Nonfarm values in most cases are also in the green zone.


In other words, the growing average total value of the momentum may well not be related to the previously published Nonfarms.



Stock instruments. The values of momentums depending on the value of the deviation


Group
Friday
The next Monday
3 days since the date of publication
1 week
since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
More than 1 standard deviation
(in the positive direction)
-0.061
0.071
0.225
0.215
0.717
0.540
Withinonestandard deviation
0.136
0.100
0.010
-0.066
0.098
0.299
More than 1 standard deviation
(in the negative direction)
-0.096
0.040
0.299
0.505
0.537
0.632

And to conclude the study, we will calculate one more indicator to assess the ratio of the average positive momentum to the average negative momentum.This indicator allows to minimize the number of unidirectional momentums to the magnitude of their strength. So, for example, the influence of a large number of positive momentums which are nonetheless insignificant by value could be undermined by a small number of negative momentums but “stronger” by their magnitude.


A value greater than 1 indicates prevalence of positive momentums, and a value less than 1 indicates that negative momentums prevail.



The ratio of the average positive momentum to the average negative momentum


The market segments
Friday
The next Monday
3 days since the date of publication
1 week
since the date of publication
2 weeks
since the date of publication
3 weeks
since the date of publication
Currency pairs
2.98
1.12
No positive momentums
0.13
0.66
0,24
Stock instruments
2.99
7.08
1.78
2.57
4.01
10,68
Conclusion

For currency pairs:

The volatility on the day of publication of the indicator is greater by 6% in comparison with the preceding week, and by 11% greater in comparison with three preceding weeks.


On the day of data publication, a weak positive correlation (0.12) is indicated between the values of the published Nonfarm and changes in quotes of the US dollar. In other periods of observation, this correlation is missing.


The momentum on the day of publication is positive but very weak.



For US stocks:

The volatility on the day of publication in comparison with the preceding periods remains unchanged.


Any correlation is missing.


For all periods of observation, momentums are positive and their values increase during week-long periods: 0.309 is the momentum of a two-week period; 0.464 is the momentum of a three-week period.


The values of momentums in the deviation group which are greater than the standard value in the positive direction are the following:

  • for a two-week period, the average momentum is 0.717
  • for a three-week period, the average momentum is 0.540


The values of momentums in the deviation group which are greater than the standard value in the negative direction are the following:

  • for a two-week period, the average momentum is 0.537
  • for a three-week period, the average momentum is 0.632


So, if there is more than 1 deviation in the positive direction during the publication of Nonfarm values, the stock market demonstrates robust growth during the periods of 3 days and 1,2,3 weeks after publication.

The market falls during the same periods of observation publications of negative values of the indicator (more than 1 deviation).



The influence of the Nonfarm Payrolls publication on the direction of quotes of the stock market has been identified.


The influence of the Nonfarm Payrolls publication on the direction of currency rates has not been identified.

XLSX (0.03 MB)U.S. Nonfarm Payrolls.xlsx

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