Stocks and Bonds Should Not Ignore Surprises in Jobs Report

By Rom Badilla, CFA

October 3, 2012

One of the most important economic data releases that can move the markets is the Jobs Report that is released the first Friday of each month. Market participants keep a close eye on this number since it provides snapshot of the health of the economy. A positive robust change in Non-Farm Payrolls means that the labor markets are growing and the economy is thriving. With positive economic growth, generally comes rising stock prices and unfortunately for bond investors, higher yields and lower bond prices. Suffice to say, the Jobs Report can move both the equity and fixed income markets in a significant way.

The question is to what degree the markets respond to changes to Non-Farm Payrolls relative to expectations. Morgan Stanley created a quantitative model that estimates the price reaction to the actual data release relative to the consensus forecast by economists. The Morgan Stanley AlphaWise Macro Team led by Ajit Agrawal, wrote in a September report on what to expect with any divergence in the actual data from expectations:

Our tick data analysis of Payroll beats / misses (5-year history) suggests a 39-bp average price reaction for the S&P 500 and a 24-bp average price reaction (or 2.9-bp average yield reaction) in 10-year US Treasuries. The following graphs show our models’ expected market reactions as a function of the data surprise.

As of yesterday, the consensus forecast for the September Non-Farm Payrolls stands at 115,000 workers. While positive, labor growth has been lackluster as the August data revealed an increase of only 96,000 individuals from the previous month. As evident by this research, any surprise or disappointment relative to consensus forecasts can have a major effect on asset prices.

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