There are many statistics released every month by the U.S. government that investors follow to assess the strength of economy, but one of the most important and widely followed announcement is the nonfarm payroll.
This statistic is released every month by the U.S. Bureau of Labor Statistics; it gives an overview of the employment situation in the U.S., not including – as the name suggests – farm employees and also a few others such as employees of the government and non-profit organisations.
The specific release of interest is the Commissioner’s Statement on The Employment Situation and the key figure is usually in the first line. For example, the statement of 7 August 2015 starts,
Nonfarm payroll employment rose by 215,000 in July..
It is the monthly change in employment (rather than the overall employment number) – and the deviation from the expected figure – that is watched closely.
The monthly nonfarm payroll statistic can have a large impact on financial markets, primarily the US dollar, but also equities and gold. Regarding foreign exchange there has been a small negative correlation between the NFP data and the US dollar Index. Below we will look at the impact on equities.
Nonfarm payroll and equities
The nonfarm payroll statistic is reported monthly, usually on the first Friday of the month. The following chart shows the average daily returns of the S&P 500 Index on the three days around the announcement date:
- NFP(-1): the average daily return on the day before the announcement
- NFP(0): on the day of the announcement
- NFP(+1): one day after the announcement
The results of analysis for two periods are shown:
- dark bars: 1990-2015
- light bars: 2006-2015
The analysis shows that since 1990 the S&P 500 Index on average experiences a negative return (-0.066% ) on the day before the nonfarm payroll announcement, a positive return (+0.068%) on the day of the release, and again a negative return (-0.004%) the day afterwards.
In the last ten years, 2006-2015, the behaviour profile has largely been the same, except the average positive return has been less on NFP day, and the negative return greater the day after.
For reference the average daily return on the S&P 500 Index for all days from 1990 has been 0.03%.
Extract taken from the newly published UK Stock Market Almanac 2016.