Myth: Revisions Are More Important Than The News

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.

There is a widely held myth that quite often large revisions in the nonfarm payrolls (NFP) overshadow the release itself.

In a previous post I noted, about an NFP release for Nov. 3rd 2006, that "There was some sentiment today that the revisions meant that although the number was lower than expected (however defined), the revision was above expectations and this might affect financial markets as much or more than the news itself."

I tested this and found that it was not true. Markets react to the initial news and not the revision.

NFP estimates “are presented as soon as sufficient data have been collected to meet standards of accuracy and reliability so that they can be used to guide policy decisions. Aggregate level estimates are published with the first release of preliminary data, usually 3 Fridays after the survey reference week. At this point, about 65 percent of the sample have been collected and used in the estimates. This is the number that the market reacts to. One month later, when over 80 percent of the sample has been collected, estimates are published for the first time for all of the detailed industries, and the second set of preliminary estimates are published for the aggregate levels. The "first final" estimates are published the following month, when over 90 percent of the sample reports have been collected.”

I took the two month lag of the revised data and included it with the initial news to see whether these revisions have any statistical effect on the EURUSD exchange rate returns one minute after the release.

The revision was not significant. It had a t-stat of 0.5 and a p-value of 0.62. Positive news and negative news were highly significant. The skewness and volatility of the expectations were significant enough to lower the mean squared error. The kurtosis of the expectations was not significant and the revision had the highest p-value (lowest t-stat).

Here is a sample of market commentary that suggests that the revisions move the markets:

1. Examples 1 & 2 - “The eagerly awaited US October Non-Farm Payroll numbers were released today. Coming in at +92K, below the mean of a very wide range of estimates, it was eclipsed by revisions to the previous months: from +51K to +148K in September and from +188K to +230K in August.”
2. “Forex Mid-Day Technical Report - Dollar Sharply Higher after Payroll Revision and Unemployment Rate - The same story again. The headline Non-farm payroll is disappointing, adding 92k jobs in Oct only comparing to expectation of 125k. However, prior month's data was revised sharply higher from 51k to 148k. Aug's data was further revised from 188k to 230k.
3. Examples 3 & 4 – “The markets are eagerly awaiting the October reading of non-farm payrolls following the massive revisions made to the August figures. Payrolls are expected to rise 120K this month, but the focus may be on September revisions. The paltry 51K report last month did little to curb enthusiasm for the US economy, due to the Labor Department’s claim that the full revision for the year in March could be an astounding 810K.”
4. “Although the September reading of US non-farm payrolls came in much weaker than expected at 51K, news that the Labor Department upwardly revised August’s figure by a whopping 188K offset any pessimism regarding the economy.”
5. Example 5 - “While markets were expecting a higher number of non-farm payroll employment for December, the strong revision on the November number should give some comfort to those that were expecting a stronger performance.”

6. Example 6 - US Non-Farm Payrolls (OCT) (13:30 GMT, 08:30 EST) Actual: 92.0K Eхpected: 123.0K Previous: 148.0K…How Did thе Markets React? US non-farm payroll is one оf thе most market moving pieces оf economic data for thе financial markets. аs a reflection оf thе overall Hеalth оf thе economy and a leading indicatоr for consumer spending, thе NFP report usually overshadows any othеr news in thе financial markets on thе day thаt it is releаsed. This wаs true for thе Fх and bond markets tоday, but not for thе stоck market. Both thе US dollar and bond yields shot uр after thе releаse оf payrolls. Even though thе Hеadline numbеr fell short оf eхpectations, thе prior figure for Septembеr wаs revised from 51k tо 148k, making thе 2 month average a respectable 120k. “

Financial commentators love to interpret market moves and attribute them to data. I love to do the same but I apply a bit more rigour to the process.