Monday, August 9, 2010

Can Nonfarm Payroll Futures Predict the Future of the Market?

While the vital Nonfarm payroll statistics and numbers are considered key economic data, one can also trade in nonfarm payroll futures and future options for speculation or risk management, which as per the Chicago Mercantile Exchange is a "transparent, straightforward and direct exposure to the government labor number." NFP futures and options are an accessible way to gain direct exposure to the government labor number or to offset unexpected financial market moves that often occur when this number is released. But can nonfarm payroll data based futures and options foretell the future of broader markets?

$25 for each 1000 jobs added or lost?

Nonfarm Payroll (NFP) futures and options on futures, offered by the CME are designed to coincide with the release of the NFP economic data each month (typically the first Friday of the month). These plain vanilla contracts are based on the monthly U.S. Bureau of Labor Statistics report that measures employment health. As it is the first major economic release each month that speaks to the condition of the prior month, the NFP is closely followed as a way to gauge how the Federal Open Markets Committee perceives economic growth.

Can Nonfarm Payroll Futures predict the Future of market?

Here are a few charts that can possibly foretell what can be expected.
This is the weekly chart covering March 2009 to July 2010

click to enlarge
Weekly chart of Nonfarm Payroll Futures

This monthly chart is very clear and mirrors the market oscillations of 2009 mostly upward till May 2010. But from June 2010 the sharp decline is telling and it appears to go more negative.

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