Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 07 June 2013 at 8:55 GMT

Nonfarm day brings volatility... or does it?

All eyes are on the US employment report today, which is scheduled to be released at 14:30 CET. Consensus expects an increase of 163,000 Nonfarm Payrolls according to Bloomberg (down 2,000 since yesterday) while we are a bit more pessimistic and target a net addition of 150,000. A minor difference you would think. However, the markets have a tendency to respond too much to (statistically) negligible changes in Nonfarm Payrolls and nonfarm days are generally perceived as being high-volatility days. But by how much does volatility increase, if at all?

A sample of S&P 500 E-mini and EURUSD spot data from December 31 2000 to May 6 2013 includes 3161 and 3244 trading days, respectively, of which 149 of them were nonfarm days though the E-mini only traded on 148 of these*. EURUSD traded on all 149 nonfarm days.

S&P 500 E-mini All Nonfarm day
Observations 3161 148
Mean 0.01% -0.10%
Volatility 1.30% 1.25%
Note: From 31 December 2000 to 6 May 2013.

The average return on nonfarm days is negative at -0.1 percent with the largest daily decline of 3.5 percent having occurred on June 4 2010. The largest daily increase was on July 5 2002 when equities* rose by 4 percent. However, while the largest increase is greather than the largest decrease on nonfarm day, there have been 14 +2 percent drops, but only seven +2 percent gains. Despite these facts daily volatility** does not increase on nonfarm days when you look at equities with volatility averaging 1.25 percent compared with an overall average of 1.3 percent.

EUR/USD spot All Nonfarm day
Observations 3244 149
Mean 0.02% 0.01%
Volatility 0.65% 0.80%
Note: From 31 December 2000 to 6 May 2013.

Turning to the EURUSD pair paints a different picture. On April 2 2004 EURUSD plummeted 1.9 percent in the largest nonfarm day decline while the pair gained 1.8 percent a few months after on August 6 2004. There have been 20 days with gains of more than 1 percent and 19 days with similar losses, and contrary to the evidence from equities there does seem to be a difference in volatility in the EURUSD pair. Average volatility on nonfarm days is 0.8 percent, but only 0.65 percent overall, suggesting an increase of 25 percent ***,****. There is a problem, however. While this may seem like a large increase it is not statistically significant. So you may buckle up and prepare for an exciting afternoon, but it is (on average) no more volatile than every other trading day.

*    It does not matter whether you use the E-mini, the actual S&P 500 futures or the S&P 500 cash index.
**   Calculated as the squared natural logarithm of open-close ratio.
***  Volatility increases by 16 percent when you look at USDJPY, but is more or less unchanged when you look at GBPUSD.
**** Using the high-low ratio instead of open-close does not alter the picture.

John J Hardy John J Hardy
Super overall point - NFP not at all what it was ten years ago and nearly impossible to trade any more - that's for sure. Still - we've just seen a rogue wave in volatility and the market could remain very nervous almost regardless of the US employment report outcome - so it's still a time to stay very careful out there.
Mads Koefoed Mads Koefoed
Indeed, John. This is also seen by looking at returns versus surprises:, which does not show much of a (linear) relationship with the S&P 500. It gets a bit better when we look at EURUSD, USDJPY and GBPUSD, but data surprises only explain approx. 10% of the daily returns.
bakrob99 bakrob99
I think it might be more helpful to measure the volatility from the release time at 8:30 ET rather than the RTH Open.


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