Tuesday, September 4, 2007

Trading the News - Non-Farm Payrolls January 2007

The purpose of this article is to show how a new employment data release (ADP Non-Farm Employment Change) is building respect amongst market participants as a factor worth considering, if not a predictive indicator for the widely anticipated Non-Farm Payrolls report. In the first week of January 2007 we saw how the ADP release had an effect on trader sentiment and expectations prior the Non-Farm Payrolls (NFP) and the potential influence this had on price action.

What is ADP Non-Farm Employment Change?
Automatic Data Processing (ADP) provides employment solutions for businesses within but not the entire labour market. The figures they release are directly comparable to the Non-Farm Payrolls report as they both measure the number of new jobs created in the previous month, excluding the farming industry. However, the ADP data is based on a much smaller sample of the labour market than official figures. The obvious problem with this is that a small sample is not necessarily an accurate representation of the entire labour market. This issue seems to undermine ADPs claims that the indicator has predictive value in regards to official statistics. It should be recognised that the ADP data is a relatively new fixture in the monthly economic calendar; it was first released in May of 2006. As you would imagine it takes traders time to attach any importance to a new report. However, mention of the ADP release is becoming much more frequent in news reports, newsletters and economic summaries as the months pass. In fact news traders (those traders who place trades based on whether data comes out inline, ahead of or worse than analyst expectations) are reporting an increasing amount of activity (buying and selling volume) at data release times as traders begin to attach more importance to the report.

The January Release
In January 2007, the ADP release fell on Wednesday the 3rd at 13:15 GMT (08:15 Eastern Time). There are still no official consensus estimates for this data but official Non-Farm Payrolls figures were expected at 115k new jobs created. The ADP release actually came out at 40k, a surprise negative number given that Payrolls were expected to show an increase in jobs. This sparked a feeling of pessimism towards Fridays news. However this was not reflected by immediate price action. Poor ADP figures (and the expectation that there will be poor Payrolls figures to follow) can be seen as Dollar negative, but this was not enough to halt the Dollars technically based rally against the majors going into Friday.
On the morning of Friday the 5th many traders inboxes were filled with newsletter and news service headlines such as Traders Braced For Poor Non-Farm Payrolls Data After Negative ADP Figures. Whether these headlines correctly encapsulated market sentiment or served to influence it remains to be seen but the reaction to Non-Farm Payrolls number would suggest that traders were pleasantly surprised. Non-Farm Employment Change came in at +167K, beating analyst expectations of 115K and contradicting the ADP figure released earlier in the week.

The price action seen on January 5th at the time of the Payrolls report is not enough on its own to suggest that the majority of traders are using the ADP figure for any Payrolls predictions. Due to the fact that the NFP came out better than expected, there were no nasty revisions to previous months data and the unemployment rate figure came out exactly as expected it was inevitable that there would be some significant Dollar buying. However, the insertion of ADP figures into the newsletter of market forecasters and news providers proves that the data is being taken more seriously and this trend will gather steam in the months to come. Traders will want to monitor the ADP employment change closely to determine whether there is indeed a positively correlating relationship with NFPs. At present it would seem that this relationship is weak at best but that is hardly surprising given the volatile nature of Non-Farm employment data and the relative infancy of ADPs data.

David Thorpe is a senior contributor for http://www.passion-trading.munbuns.com a free educational resource centre for traders and investors. The site has a dedicated forex trading and currency trading portal and its goal is to stimulate the minds of its users, enabling them to achieve a greater understanding the forex market, thus helping them to become more profitable.