U.S. Non-Farm Payroll Jobs and the Dollar

January 7, 2010

The monthly U.S. jobs report is arguably the most newsworthy economic data release and in theory carries the potential to move the dollar strongly.  Ordinarily, one would expect a weak report, meaning one in which employment does not expand much or expands less than analysts forecast, to depress the dollar, and vice versa.  However, the U.S. and global economies are just emerging from a deep recession, which complicated the dynamics of the dollar’s response to the monthly labor market survey and other economic data releases.  The unusual nature of this period gave the dollar an upside bias.  On days when the figures were surprisingly good such as those released on December 4, 2009 for the month of November, the dollar oftentimes appreciated against the euro, a typical knee-jerk reaction that one would ordinarily anticipate.  On other days when a bad report occurred, however, the dollar most times benefited from a spike in risk aversion and still proved resilient.

I examined the dollar’s performance after the last fourteen employment data releases beginning with October 2008 figures released on November 7, 2008. I specifically checked out the same-day movement in EUR/USD and USD/JPY from 11:45 GMT to the New York closing on the day of the release.  The findings for the yen were unremarkable, inconclusive, and are not here presented.  This is not surprising.  The euro/dollar pair is the best gauge of general sentiment toward the dollar, whereas dollar/yen tends to reflect developments in Japan.

Of the fourteen observations, the dollar moved less than 0.5% up or down six times and +/- 1.0% or more on six other times.  Only twice did the euro’s change lie between a half percent and one percent.  The dollar advanced eight times and eased six times, and the absolute average movement was 0.9%, which doesn’t really characterize a major market event.

The table below presents the results.  Column one shows the date of the release.  Column two has the change in thousands of non-farm U.S. workers as reported that day, and column three compares that to the prior consensus of market expectations.  Column four shows what the change in jobs has been revised to subsequently.  Column five gives the dollar’s percentage rise or fall against the euro that day, and column six is the euro’s closing level.

  NFP 000’s Forecast Revised to $ Chg,% E/USD
12/04/09 -11 -125 n.a. +1.4% $1.4851
11/06/09 -190 -175 -111 +0.2% 1.4845
10/02/09 -263 -188 -139 -0.3% 1.4578
09/04/09 -216 -230 -154 -0.3% 1.4307
08/07/09 -247 -345 -304 +1.3% 1.4169
07/02/09 -467 -370 -463 +0.6% 1.4002
06/05/09 -345 -550 -303 +2.6% 1.3910
05/08/09 -539 -590 -519 -1.7% 1.3629
04/03/09 -663 -650 -652 -0.7% 1.3477
03/06/09 -651 -648 -681 +0.2% 1.2654
02/06/09 -598 -525 -741 -1.1% 1.2942
01/09/09 -524 -525 -681 +1.7% 1.3472
12/05/08 -533 -340 -597 -0.2% 1.2738
11/07/08 -240 -240 -380 +0.5% 1.2722


In this period of extraordinary job losses, the market consensus did a rather good job of predicting the initially reported figure.  The absolute size of the error averaged 69K among those 14 months, a margin of error of less than 20%, and the algebraic mean netted to zero, indicating no forecasting bias.

The biggest move in the dollar from our sample was a 2.6% advance against the euro after May employment was reported to have fallen 345K, 205K less than analysts had predicted.  As noted already, the dollar also reacted quite positively to the November 2009 data reported a month ago.  After learning that only 11K jobs were lost instead of the predicted 125K, investors bid the dollar up 1.4%.  And when July job losses were announced at 247K, not 345K as predicted, the dollar gained 1.3%.  But the dollar did not get hammered, on the other hand, when a 533K drop of jobs in November 2008was reported instead of 340K as forecast.  The greenback edged only 0.2% lower that day, and it advanced 0.6% last July 2nd, after a 467K jobs decrease was announced, which surpassed the market consensus forecast by almost 100K.  When September 2009 figures were released on October 2nd showing a 263K drop in jobs, 75K more than analysts predicted, the dollar eased by just 0.3%.  The biggest dollar fall on a jobs report day was a 1.7% decline last May 8 when April employment was reported to have imploded by 539K, but that decrease was actually as not as big as feared.

Not every jobs report produced an upside-down dollar response from what conventional wisdom might suggest.  The January 2009 data released February 6 were dreadful.  Jobs had plunged 598K.  That was more than the 525K drop that analysts had predicted, and it would be subsequently revised to a decrease of 741K, the worst month of the recession.  The dollar depreciated 1.1% on February 6 after the numbers were announced.

For much of the time depicted in the table above, the dollar was trending lower against the euro, moving from 1.2722 per euro in early November 2008 to 1.4851 when the November 2009 data were released a month ago.  The dollar’s resilience on job report days — living essentially in a heads-it-wins-tails-the-euro-loses world — therefore was not simply a reflection of the currency pair’s underlying trend over the past year.

The U.S. labor market had been expected to lag other data, remaining in a deteriorating mode well into any recovery of GDP.  One of the pleasant surprises lately is that labor statistics have also been outperforming analyst expectations.  I suspect this is due partly to people losing benefits or dropping out of the labor market.  Be that as it may, the six-month moving average of changes in non-farm payroll jobs was 217K in October 2008, the first month shown in the above table.  Such swelled to 645K during the six months to April 2009 but had dropped back to 197K by the six months to November 2009.  That’s a much more symmetrical formation than what most analysts were expecting.

It remains to be seen how soon the dollar reverts to the orthodox pattern of benefiting on good or better-than-forecast jobs data, and vice versa.  The timing is likely to be correlated with the point when investors stop treating the U.S. currency as a carry trade-funding currency on a sustainable basis.  I doubt we are completely back to that point.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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