WHY THE RANGE OF ESTIMATES IS IMPORTANT
Data results that fall outside of market low and high expectations tend to move markets more significantly for several reasons:
- Surprise
Factor: Markets often price in expectations based on forecasts and
previous trends. When data significantly deviates from these
expectations, it creates a surprise effect. This can lead to rapid
revaluation of assets as investors and traders reassess their positions
based on the new information. -
Psychological
Impact: Investors and traders are influenced by psychological factors.
Extreme data points can evoke strong emotional reactions, leading to
overreactions in the market. This can amplify market movements,
especially in the short term. -
Risk
Reassessment: Unexpected data can lead to a reassessment of risk. If
data significantly underperforms or outperforms expectations, it can
change the perceived risk of certain investments. For instance,
better-than-expected economic data may reduce the perceived risk of
investing in equities, leading to a market rally. -
Triggering
of Automated Trading: In today’s markets, a significant portion of
trading is done by algorithms. These automated systems often have
pre-set conditions or thresholds that, when triggered by unexpected
data, can lead to large-scale buying or selling. -
Impact
on Monetary and Fiscal Policies: Data that is significantly off from
expectations can influence the policies of central banks and
governments. For example, in the case of the NFP due today, a weaker
jobs report will fuel speculation of nearer and larger Federal Open
Market Committee (FOMC) rate cuts. A stronger report will diminish such
expectations. -
Liquidity
and Market Depth: In some cases, extreme data points can affect market
liquidity. If the data is unexpected enough, it might lead to a
temporary imbalance in buyers and sellers, causing larger market moves
until a new equilibrium is found. -
Chain
Reactions and Correlations: Financial markets are interconnected. A
significant move in one market or asset class due to unexpected data can
lead to correlated moves in other markets, amplifying the overall
market impact.
WHY THE DISTRIBUTION OF FORECASTS IS IMPORTANT
Another important input in market’s reaction is the distribution of forecasts. In fact, although the range of estimates for the US unemployment rate today is 3.9%-4.1%, only 8.7% of forecasters see a 4.1% rate, while 71% expect 4.0% and 20.3% anticipate 3.9%.
This means that even if the unemployment rate prints within the range of estimates at 4.1%, it would still be seen as a surprise and trigger a big market reaction. I can see the market going into risk-off on a 4.1% unemployement rate.
For the Non-Farm Payrolls, although the range of estimates is between 140K and 250K, a number outside the 170K-230K range would be seen as a surprise.
Lastly, for the Average Hourly Earnings Y/Y, 66% of forecasters see a 3.9% figure, while 17.3% expect 4.0% and 17.2% a 3.8% reading.
This article was written by Giuseppe Dellamotta at www.forexlive.com.