Market Noise

On a (pay)roll: data, myopia and the strength of the US economy

Humans like to think they know more about things than they really do. This is perhaps more true in finance than elsewhere, because the abundance of data lends itself to analysis, pseudo-science, and experts.

One of the data points that draws most attention is the US non-farm payrolls, which is a measure of new jobs created. This is important for telling you a trend, but specific data points don’t often tell you much (Barry Ritholtz has been making this point for years). They are based on a sample, they can be impacted by unusual one-off events, and they are often revised heavily.

That doesn’t stop journalists and others seizing on any large surprises. The May figure was seen as dismal and shocking, influencing everything from European stock prices to expectations for US interest rates.

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Even the Fed acknowledged the impact of this single data point.

“Market participants’ expectations for a firming of monetary policy at the June FOMC meeting rose considerably in the middle of the period [since the April meeting], largely in response to monetary policy communications, but those expectations subsequently fell sharply following the release of labour market data for May.”

So, it seems that the May number was enough to bring about a significant change in investors’ beliefs about longer term trends.

Here is the same chart including the latest non-farm payrolls announcement.

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In context of the long term there seems to be little information in the May release:

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The picture of a modestly growing US economy seems broadly unchanged versus a couple of months ago, acknowledging the challenges of interpreting the data. Granted the UK’s vote for Brexit has introduced some general uncertainty, but even the dovish St Louis Fed President Bullard cited it as likely having “close to zero” impact on the US.

In spite of this relative stability in data, it feels like the range of scenarios that investors are willing to countenance has changed markedly. The market-implied probability of a rate hike by September has fallen from 61.1% before the May payrolls number to 19.2% today and 30 year treasury yields are more than 30bps below where they were.

It is this type of move that can create investment opportunities. Most of us know that the short term can’t help us much in knowing the future. We also can’t even be sure that the latest data is even correct: since 2000, US GDP growth numbers have ended up being changed between initial and final release by 1.2% points on average. This is a huge amount of uncertainty given the average GDP growth of only 2.3% over the same period, and is reflects a pattern across countries.

When markets move significantly on short term data it may well advantageous for those with longer time horizons.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.