NFP Friday: Your Visual Guide

The markets have been eagerly awaiting the 1st NFP of the year. Whatever the outcome, today's article intends to look at a few numbers and study last month's price action, to help you quantify the release when it comes out to better prepare you for any subsequent moves.

JAN NFP: 194k CONSENSUS

The automatic trendline (yellow) highlights how the actual result is within an uptrend, making negative results increasingly more unlikely. Additionally the past 4 releases have either been above or on the 3 month average to further highlight increase in momentum on job creation.

- All actual since 2010 have been positive
- 2 of these have been above 240k
- The majority of releases being under 200k
- Over the past 12-months only 2 releases have come in less than the 3-month average.
- The previous 12-month period saw 5 of the releases beneath its own 3-month average

THE DIFFERENTIAL
The chart below shows Actual (green) with Consensus overlaid (blue). This is to highlight how often the 2 numbers disagree, but as traders this is what we want to see as it is the deviation away from the consensus that really moves markets, regardless of the direction (+ or - from consensus). The larger deviation away from the consensus, the larger the subsequent moves we can expect from the markets.

ACTUAL vs CONSENSUS: FREQUENCY

To make this easier to visualise I have plotted the graph as the difference between the two. A positive reading means we beat the consensus, whilst a negative reading means the NFP came in less than expected.

Since March 2007, over 82 NFP releases:
- The majority of the data comes in less than 80k
- Only 6 releases are between 80-130k
- Only 2 above 130k since
- October's release was the largest differential in 8 months

FREQUENCY DISTIBUTION: Actual vs Consensus

Taking this a step further I have created a frequency chart to better quantify the likelihood of a shock announcement. This helps us quantify (approximately) the likelihood of a major differential from the consensus and create realistic expectations.

Interestingly, over the past 17 months, 13 releases have come in above expectations (76.4%) to highlight the pessimism of US job creation - whilst US Equities continued to trade to record highs fuelled by the Asset Purchase program.

Whilst I admit this is not the most comprehensive way of calculating probabilities, it serves simply to provide us with a simple benchmark leading up to the release.

The data below uses the past 80 data points from NFP and is correct up until November 2013. The idea is to quantify typical deviations away from consensus and roughly estimate 'surprise' numbers to watch out for, in hope of capitalising on a larger subsequent market move.

NFP Above Expectations
+20k = 15%
+60k = 12.5%
+40k = 10%

Below Expectations
- 40k = 11.25%
- 60k = 7.5%
- 80k = 5%

Between
-20k to +20k = 38.75%
-40k to +40k = 48.75%

SUMMARY:

- A higher-than-expected NFP tends to be bullish for USD
- A lower-than-expected NFP tends to be bearish for USD
- I suspect we'd need to see differences of +/- 50k-60k from the consensus before we can expect more substantial moves.
- If we see numbers within the +/- 20k-40k range then I would expect more choppy and indecisive price action at, and just after the release before typical trends went on their usual route.

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