Special Report - Can Markets Trust the NFP Data?

Last updated 7/2/2009 5:05 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Yesterday the ADP number forecast an increase in US unemployment rolls of -473K versus current market expectations of -374K print. After faltering for about thirty seconds, the currency market dutifully ignored the data and commenced a day long rally in risk currencies on the assumption   that ADP’s forecast record is patchy at best. It is easy to see why FX traders would be so dismissive of  the ADP data given the fact  that last month the service forecast a drop of -532K while the actual NFP number printed a much stronger -345K.

Looking at the data more closely however, there is a strong case to be made that over the past six months, the initial  NFP  reading is inevitably wrong while the ADP forecast is ultimately proven right. Since December of 2008 the initial NFP readings showed the following results:

Initial NFP

Meanwhile initial ADP readings were:

With the exception of January and April the ADP calls have been consistently more bearish than the initial NFP results. What were the actual NFP results once the data was revised in the flowing months?

Revised  NFP results

In retrospect with the exception of January 2009, the ADP data has been consistently more accurate than the initial BLS readings. This dynamic  suggests that even if today’s NFP result is better than yesterday’s ADP reading, the actual data may be revised downward in the month of July.  That assumption would be further strengthened if the NFP numbers for April which were considerably better than last month’s ADP estimate are revised downward in line with the trend in 2009.

This discrepancy could partially explain the whipsaw price action in EUR/USD this year during the NFP sessions. The pair tends to move in one direction right after the release only to quickly reverse once the revision data is absorbed by the market.  Today’s reaction may well follow the same script as the trading rule for NFP report in 2009 appears to be:  don’t trust the data.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.