How the main futures reacted to the Non-Farm Payrolls, US wage growth and US unemployment rate

Introduction

The Non-Farm Payrolls is one of the most important macroeconomic releases of the month. According to my master’s dissertation, it’s the macroeconomic release that has the biggest effect on the markets.

If we look back 10 years, we can conclude that the biggest impact in the markets has been made by the monetary policy applied by the different central banks around the world.

The Figure

I expected a lower figure like the most part of Wall Street analyst… To my surprise, the US added 201000 jobs in August. The previous figure was 157000, so we saw an important increase. The unemployment rate was unchanged at 3.9%. Probably the most important release of the day was the US wage growth. It showed 2.9 % which is a level that we hadn´t seen since 2009. The US economy keeps pushing and probably we will see another rate hike in the next month. Considering this good news we should expect a sell-off on the fixed income futures.

Eurodollar

    Eurodollar Dec18 futures, 15 min, source: TradingView

The positive surprise on the US wage growth and the US Non-Farm Payrolls create an opportunity to sell for the traders.  Maybe you think that 7 ticks are not enough but considering the nature of this product is a big change. You can compare the daily range from the previous days in the chart above.

Fed Funds

    Fed Funds Jan19 futures, 15 min, source: TradingView

The traders reacted in the same way as the case of Eurodollars. It took this future to the previous support at 97.65. Considering the upcoming rise in the US interest rates, I expect this future to keep falling.

10Y T-Note, 5Y T-Note and 2Y T-Note futures

We saw a strong sell-off in the US bond futures. The main difference between them is the range of the movement. Obviously, the longer the duration, the bigger the volatility and the movement range as we can see in the following charts.

   10 Year T-Note Dec18 futures, 15 min, source: TradingView

The 10 Year T-Note Dec18 futures fell 49 ticks. It broke the previous support.

    5 Year T-Note Dec18 futures, 15 min, source: TradingView

Even if the chart seems similar, the 5 Year T-Note Dec18 fell 32 ticks.

    2 Year T-Note Dec18 futures, 15 min, source: TradingView

It fell 11 ticks and again we can see an important move.

An alternative

The main problem of trading the Non-Farm Payrolls is that the liquidity disappears just before the data is released. There is the possibility to execute at a bad price if we enter a market order.  Another problem is that you shouldn’t place a stop loss near the limit order because probably it will be triggered.

The alternative of trading the outrights would be trading spreads. The advantage is that we can trade a bigger position than in the outrights because we are hedged (or at least in part). If we take the spread between the 10 Year T-Note and the 5 Year T-Note at the ratio of 1-1, we can see that movement was only 17 ticks. If we decide to trade this spread and considering positive news for the US economy, we should sell the future that represents the future with longer duration and buy the other one.

Summary

We have seen how a macroeconomic release can affect the markets and how the traders interpret the data and execute the trades.  Nowadays, at least 70% of all the trades are executed by automatic trading systems and they are quicker than the point an click traders so making a profit in this kind of releases is getting really difficult. The only possibility would be position yourself with a small size in the right side of the trade and with a reasonable stop loss. If you don´t want to trade the outright, you can trade the spread. In this case, you need to make sure that you make enough ticks to cover the commission because you have double commissions. I hope you like it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Concerns about the US inflation

Yesterday, we saw the FOMC meeting minutes and they delivered what the market expected. They held the rates unchanged and they confirmed that the process of balance sheet normalization will continue. The Fed highlighted the performance of the economy and the low unemployment. It’s true that the US economy is strong and the last GDP reading was better than expected. However, everything is not as the Fed would like it, and FOMC members expressed their concern about the inflation outlook. Let’s see how the markets reacted:

EURUSD December 2017 future

     Source: TradingView, EURUSD Dec17 future, 1 Hour

The Euro has been rising since the beginning of November. If we add to this trend the inflation concerns the result is a weaker dollar. We didn´t see a significant movement, the candle highlighted in yellow shows the upside movement after the FOMC minutes, as you can see the biggest movement was earlier in the morning.

10 Year T-Note December future

     Source: TradingView, 10 Year T-Note  Dec17 future, daily

Everytime that there is a negative outlook the bond futures raise, and this is what the 10Y T Note future did yesterday. I’ve been following for a while this contract and there is a clear triangle that if broken, I believe that it would go up to the resistance at 125.75.

2 Year T-Note December future

    Source: TradingView, 2 Year T-Note  Dec17 future, daily

In contrast with the 10 Year T-Note, the 2 Year T-Note hasn’t swung. The bearish trend is remarkable.

10 Year T-Note - 2 Year T-Note December spread

     Source: TradingView, 10 Year T-Note-2 Year T-Note Dec17 spread, daily

I’ve chosen to spread 1 contract of the 10 Year T-Note future versus 3 contracts of the 2 Year T-Notes. In my opinion is the best spread you can make with these two futures.

Yield between the 10 Year T-Note and the 2 Year T-Note

    Yield between the 10 Year T-Note and the 2 Year T-Note, source: St. Louis Fed

Historically this yield spread is an indicator or the recessions. We can see that it has narrowed during the last 4 years. This indicates the flattening of the interest rate curve.One of the reasons is the improvement of the US economy is pushing the short-term yields higher. The second reason is there is a strong buying pressure in the long maturities that doesn´t allow the yields to go up.

Conclusion

The Federal Open Market Committee statement doesn´t  significantly affect the markets if it delivers what the analysts expected. If it had been hawkish on the inflation outlook, we would have seen a strong bond selloff and buying pressure in the USD. The macro indicators are important but in trading is better to focus on the difference between the figure and the value expected by the market participants. I would use the yield spread introduced in this post for a medium or long-term investment. I will publish a strategy based on the yield spread between the US 10 year bond and the US 2 year bond in the future.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

USD after Non Farm Payrolls

I’ve been talking about the US economy these days. One of the most important figures was released yesterday, the US Non-Farm Payrolls. The market expected a lower figure due to the problems caused by the hurricanes. The expected figure was 80k, which I thought that was a good forecast. My surprise came at 8:30 US time (13:30 in UK, 14:30 in Europe)  when I saw that the NFP was -33K. In contrast, the unemployment rate was 4.2% better than the 4.4% expected. I thought that the US dollar would sell off at this time. I expected a rise in the T-notes futures and the eurodollar (interest rates futures). According to the news, the market should ignore the NFP September figure as external factors have temporarily affected the economy. The unemployment rate is really good, but I thought that I lost my touch with the market when I saw the initial rally in the dollar. Luckily, the rationality appeared after a couple of minutes and the initial movement was reversed.

Let’s check how it affected some currency pairs, 10Y T-Note Futures and the Spread I commented yesterday:

Euro

    Source: TradingView, EURUSD Dec17 futures, 30 min

 As I said before, the initial movement was a sell-off. This is a 30 min chart so you can't see when it started the reversal but you can see the big shade in the candle highlighted in yellow. After a couple of hours, the max of the day was broken.


GBP

    Source: TradingView, GBPUSD Dec17 futures, 30 min

In the case of the British Pound was a bit different. The first reversal was really strong. The buyer's pressure was very high. I guess they shared my thoughts. This movement wasn’t successful at all. In the next hour, he dollar raised vs the pound but it stopped around 1.3060. After that, this contract went up.

JPY

    Source: TradingView (OANDA), USDJPY , 30 min

The USDJPY behaved like the British Pound.  It went up until the buying pressure disappeared. The reversal was bigger than the initial movement.

10Year T-Note Futures

    Source: TradingView, 10 Year T-Note Dec17 futures, 30 min

Here we can see the correlation between different assets. The first movement was a sell-off, and then it reverted back the whole movement after two hours.  If you think about it, trading currency futures and bond futures is the same. You are trading interest rates. (Currency futures: Difference between expected interest rates in two countries or economic areas 

Bond futures: expected interest rates )

Eurodollar Spread

    Source: TradingView, Eurodollar spread GEH18-GEZ18, Daily min

This is a curiosity because yesterday I talked about interest rates. The spread moved up (the market considered that the figures were positive for the economy) but after a while, the spread fell. This spread was trading in 28 once the figure was released. At the final of the day, it closed in 26.5, so three prices movement.

Conclusion

I think the first movement was positive for the dollar because the Fed said that they will ignore September’s employment data because it´s a temporary shock. The ISM Manufacturing PMI and the ISM Non-manufacturing PMI were better than expected.

It´s really difficult to trade economic releases. You can be right, theoretically speaking, but if you have tight stops or a bad risk management, you will lose and it´s frustrating to see the market doing what you thought before after you were stopped out. You need to be right and enter with the order flow. It's not easy. I hope you like this post. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved