How Quickly Do Markets Respond to NFPs?

It is not news that news moves financial markets. This blog will publish research on how, when, why, and which news moves what financial markets.

How quickly do financial markets react to news - specifically the Non-Farm Payrolls ("NFP") news?

To answer this, I started with the U.S. non-farm payrolls data as this was found by others to be a significant announcement. For a group of commodities, exchange rates, bond, and equity prices regressions were run of the form:

X_i,j,t =β_i,jN_j,t+ε_i,j,t

Where i is an index of how many periods are included in the cumulative return calculation from 1 to 31; j is an index of financial markets from 1 to 14 (where the markets are: Gold; AUD; CAD; CHF; EUR; GBP; Heating Oil; JPY; Natural Gas; S&P 500; 2-Year T-Bond; 5-Year T-Bond; 10-Year T-Bond; 30-Year T-Bond), N the news or surprise in the announcement as measured by the difference of the actual from the mean of the economic derivative-based expectation.

Charting, in the Figure below, the Adjusted R² (which is the same as the R² in this case), a couple of findings become clear.

R² For Announcement Effect Regressions For Various Financial Markets for Non-Farm Payrolls – Cumulative Returns

1. The maximum correlation is often immediate, one minute after the announcement at 8:31am.(Note that on the chart this corresponds to the interval 2 since 1 represents the cumulative return from the 8:29am close to the 8:30am close).
2. The news effect is often very significant in these regressions.
3. The markets group quite distinctly into:

• Commodities (excluding Heating Oil) equities and bonds that have an R² of 0.1 or less. Heating Oil that rises to an R² of 0.12 after 15 minutes.
• Foreign exchange rates that have R² ’s that peak between 0.35 and 0.5 1 minute after the announcement and decline thereafter.

The 30-Year Treasury has the lowest correlation, the EUR/USD exchange rate the highest.

It is clear from the above that researchers using a 25-30 minute announcement window, or 5-minute returns, will find a relationship but that higher frequency data narrowing the window maximizes the news effect.

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