This is about trading macroeconomic news releases using spread bets such as central bank announcements, GDP releases, retail sales figures, consumer confidence gauges, purchasing managers’ indices (PMIs) or even non-farm payrolls. Investing basing oneself on fundamentals or news trading is different from technical analysis strategies and requires a grasp of macro economic mechanics and an exact interpretation of particular news headlines. Such interpretations can be difficult and include news events like when companies release trading updates, data reports released by government agencies (for instance GDP or inflation figures), or when a geopolitical happening impacts marketplace activity. And whenever such data reports exceed or miss expectations, one can expect market volatility with consequent sizable price swings.
Trading the Announcements
This one appeals to people with less experience but it is advisable to paper trade to start with so that you get the hang of it. There are times throughout the week when certain announcements are made that can have an effect on the markets. These announcements are planned in advance so that you are not taken by surprise and the full listings can be found on websites such as the ForexFactory.com.
Let’s say that the chancellor is making an announcement on the state of the economy. There is a good chance that the markets will react by either going up or going down so this strategy will involve betting on the FTSE. You will have to use two Spread Betting firms and on one place a small sell on the FTSE and on the other a small buy with a tight stop loss on each. The idea is that if the market shoots up the sell trade will be closed out and the buy trade will make you money and visa versa.
When you are used to this technique you can start to use it on the currency markets and the Dow Jones as the movements on those markets can be quite dramatic and as there can be several announcements each day so you can find yourself to be quite busy.
The Non-Farm Payrolls (NFPs) consist of a monthly data report issued by the USA Labour Department indicating the number of employed workers in the USA. It is commonly regarded as an important piece of data and can cause dramatic volatility on its release. The report covers USA construction and manufacturing companies and represents the number of jobs added or lost in a specific month. Should the employment numbers turn out to be better than expected, the markets as a whole can be expected to rally. But should they disappoint investors are likely to see this as a negative signal. Gold is also likely to rise on disappointing figures as a shortfall might push the USA Federal Reserve on to further quantitative easing to help stimulate the economy and create jobs.
“The USA non-farm payrolls figure is particularly significant as the size of the USA employment force is a good indicator of the health of the US economy. Its released 1.30pm UK time on the first Friday of the month and is a key figure to follow as an indicator when the Federal reserve might move to curb its quantitative easing programme.”
So for instance if weekly claims have gone down over the previous four weeks it’s a fair bet that NFP will have a better than 50% chance of going up. In the days and weeks ahead that should underpin support for the bull or bear trend until different data says otherwise. The key here is market expectations; it is not whther the numbers are good or bad but more about how they differ to expectations. If the market is expecting that 300,000 will be added and the report announces an increase of 200,000, this might well lead to a wider market pullback even though an increase of this size is considered ‘healthy’ by past comparisons.
Another data report that is released alongside the Non-Farm Payrolls highlights the number of unemployed as a percentage of the USA labour force. These figures are released on the third Friday of each month and are considered important as a health barometer of the USA economy. The caveat with trading such data releases is that there is often an immediate spike followed by a subsequent retracement so one has to be quick to be ready to exit positions quickly.
Trader’s Note: The jobs report on Friday was over the amount needed to “pique my interest” that I mentioned the other day. A few words of caution that go along with my thoughts that Non-Farm Payrolls are overrated as a snapshot of the US economy in any given month:
Firstly, in early August last year before the market spent the rest of 2011 in a tailspin, Payrolls printed a solid 117k (later revised down) – ahead of expectations and an improvement on the previous few months. It would’ve been a red herring and was later revised down. Secondly, the indicator would’ve told you to ignore PMI peaking a month earlier in 2010, giving really positive readings going into the summer in spite of declining leading indicators. The market and economy stumbled badly enough that the Fed had to intervene as Payrolls then went into negative territory very soon after.
So not only are Non-Farm Payrolls tough to accurately forecast but they’re also highly volatile and prone to revision. Which isn’t helpful when even a few k difference is “good” or “bad” news. Not to mention they’re a labour stat, so are unlikely to lead the rest of the economy. Noticing the green shoots in the economy early was crucial in 2009 – NFPs might have left you waiting until August to put money at risk, opposed to March/April, a big % difference in US indices.
Beware also that great figures might lead to revisions in economic policies by politicians. Great looking nonfarm payroll figures could convince central banks to halt quantitative easing which could push stock prices back. There are a few other examples that make me wary of following NFPs, but no question, 163k if unrevised would put a thru in the summer malaise of the US economy as it did in December 2011. ISM below 50 is still a very troublesome sign, but it too failed to make a lower reading than last month. The only thing confusing at this time is why the market wanted to go higher from June onwards – with this kind of data, we’d expect the Dow to be some way off making new highs, but not so.
That’s not a surprise from a technical point of view as plenty top technical analysts here called it accurately and have rode this wave back up to Dow 13k – but with poor economic data, the summer being upon us and a lack of action from Fed/ECB, I couldn’t have expected things to work out so pleasantly.
So I’m unlikely to open a long just prior to NFP, I’d prefer to place an order above and hope it piles through and takes me with it. An alternative strategy is to look at the previous four weeks claims figures which gives an indication of what way monthly NFP figures should go. Claims have been falling on average over the past four weeks so monthly NFP should be good.
Question from a reader:
“U.S. Jobless Claims Fall Over Month to Lowest Since 2007Q.
DOW reverses over 100 points in an hour on open.
Answer: Come off it. That’s not even a challenge. Markets open strongly on China data. Attention turns to imminent payrolls release. Data is out. Headline is “Jobless claims lowest since 2007.” Market tanks 130 points in two hours – QE is coming. Head trader on beach outside Long Island holiday home calls in. Junior trader left minding the desk – “QE is ending – look at the jobless numbers. I sold lots of stuff. This is it. It’s all over, man – we’re down 130 points already…” panic-stricken voice down the line. Head trader, laconically, “Buy it all back, you dumb f***. Jobless claims were just 5k off their expected, and they’re volatile in July anyway because the auto industry usually closes down for re-tooling and all sorts of other seasonal sh**. If you haven’t bought everything back you sold by lunchtime I’ll fire you, from here.”
Head trader calls back later. “So where’s the market now? Hardly changed from the open. Exactly, you dumb mutha. Did you buy everything back? You’d better. Do you know it’s August? Do you know why I’m on holiday THIS week? You are so never going to make Vice President, you dumb f***.”
A few other USA economic events well to keep taps of include GDP data announcements (which are revised on the last Thursday each month at 8.30am EST), consumer price index inflation (released on the middle of each month) and retail sales figures that are released around the 13th of each month.
GDP or Gross Domestic Product are a monetary measure of the value of all finished goods and services produced within a particular country by both the private and public sectors, for a specific period of time. It is commonly regarded as a measure of a region or country’s economic growth with a positive GDP indicating healthy growth which is likely to have a positive effect on the stock markets. On the other hand a negative reading could lead to a sell-off in the markets.
The CPI denotes the consumer price index and is a popular indicator to measure inflation in a country’s economy. The indicator measures the average price level of a fixed basket of goods and service that are acquired by consumers in an economy, with quarterly changes in CPI indicating rising or falling inflation. In a nutshell, inflation is an increase in the overall prices of goods and services.
It is worth noting that in terms of evaluating different indicators, data like unemployment claims and NFPs are often heavily revised from the original data handed to the market on the day. So you sometimes end up with the revised data looking better than the original signal would’ve suggested – I prefer seeing the data that the market would’ve seen in real-time without adjustments, as that’s how investors would have to use the data in reality.
News announcements aren’t limited to Non-Farm Payrolls, GDP or CPI either. For instance the Federal Open Market Committee recently announced that they wouldn’t be introducing further quantitative easing and will leave interest rates unchanged at historic lows – all these have potential to move the markets based on market expectations.
It is important to recognise that the market has a tendency to anticipate forecasts so if an actual figure emerges as the same as the forecast then the market won’t move much. For instance in the month the Fed announced a second round of quantitative easing the dollar hardly moved but then it had already been weakening months in advanced of the hinted stimulus. The market always looks to the future so to stay ahead you have to not just look at present figures but also to economic forecasts. A possibly better way to trade economic announcements is to wait a little until prices have settled to see where the balance of the market sentiment is and ride the trend into the closing session.
The PMI data is used as an economic indicator by a number of economists and analysts and is based on monthly surveys of “carefully selected companies”. Aimed at giving an advanced picture of the state of a country’s private sector economy, the indexes track a range of variables including output, new orders, stock levels, employment and prices. A figure of 50.0 is used to signify growth on a previous month, while a drop below 50.0 signifies a contraction.
For instance February’s (2014) HSBC Purchasing Managers’ Index (PMI) revealed a slowdown in China’s manufacturing activity, with the index slipping to just 50.1.
‘The slower growth of manufacturing activities in April confirmed a fragile growth recovery of the Chinese economy as external demand deteriorated and renewed destocking pressures built up,’ says Hongbin Qu, chief economist for China & co-head of Asian economic research at HSBC. ‘The looming deflationary pressures also suggest softer overall demand conditions. All this is likely to weigh on the labour market, which is likely to invite more policy responses in the coming months.’
Economic data Q&A with an Industry Insider Analyst
How much spread betting activity and of what nature do you see after US non-farm payroll is released?
We always see an increase in business and turnover on index futures in the run up to non-farm payroll figures. They are one of the most important barometers for US employment and therefore the overall state of the US economy as they strip out the seasonality of employment.
Is this economic data one of the ones that creates the most activity? How important is US data to UK traders and what else could UK-based traders look out for?
It’s fair to say that the importance of US and UK economic data has been somewhat diluted by the need for political stability, unity and decisiveness. Comments from the Governor of the Bank of England or ECB are arguably more indicative of policy swings and actions that are going to be taken by Europe and the US than the actual payroll figures. We advise traders to remain as astute to the sentiments and statements of politicians as they are to traditional economic indicators.
Having said that, with the recent market volatility the positive non-farm payroll figures led to very large spikes in many instruments, not least Wall Street, which caused many short-positions to be stopped out immediately with traders unable to react quickly enough to the market movements. The inference as to the correct setting of stops and limits is clear.
It is important to note that trading of economic news can be dangerous and is not for the faint of heart. A negative USA non-farm payroll report is normally bad for equities but we have witnessed episodes in the past where bad news is actually good news in the medium-term as it increases the likelihood of additional central bank intervention. Also, market sentiment can change very quickly so traders should be quick to react to changing market conditions.
“Traders should be wary of negative payroll figures, if they are too negative it could increase the chances of Ben Bernanke and the Fed introducing QE3 and the equity indices would be the most likely beneficiaries of this.”