Measuring The Statistical Insignificance Of The Monthly Jobs Report (October 2007 Edition)

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This morning, the Non-Farm Payrolls reports showed a net gain of 110,000 jobs in the month of September and an upward revision on August's data. 

Markets expected some strength in the report, but not this kind of strength.  Already, mortgage markets are down 28 basis points.

Prior to this morning's release, Fed Funds Futures showed an 88% that the Fed would lower the FFR again at its October 30-31 meeting. 

Those expectations are changing in the wake of the jobs report and Wall Street now thinks the Fed may have been too hasty in lowering the Fed Funds Rate to 4.750% last month. 

This is a psychological play because -- from a statistical standpoint -- the numbers don't add up.  The variance between expectation and reality are drops in the proverbial bucket.

Heck, let's leave the proverbs aside and use real-life examples.  Consider the following (subject to revision in November and December):

• 10,000 more jobs were created in September than was expectated
• 93,000 more jobs were created in August than previously measured
• 25,000 more jobs were created in July than previously measured

Adding it up, today's actual news was that the number of working Americans was off by a measure of 128,000 against the total number of employed people of 153,500,000.  In percentage terms, the "surprise" represents 0.0834% of the overall workforce.

Now, let's put that 0.0834% adjustment in mathematical perspective:

• 0.0834 percent is one more square foot in this John Harper-sold home
• 0.0834 percent is one more student at McCosh Elementary School in Chicago
• 0.0834 percent is one more resident of Guyan Township in Ohio

Statistically, 0.0834 percent is insignificant.  And yet, mortgage rates are surging higher today.

Just like the last two times (1 2) I did this, we can see how markets can react as forcefully to data because of psychological implications, as because of a fundamental analysis.