The US Non-Farm Payrolls report, or NFP for short, is one of the most closely watched economic indicators worldwide.
The Bureau of Labour Statistics (BLS), an agency of the US Department of Labour, releases this report monthly to provide valuable insights into the health and employment rates of the US economy.
It’s become a key measurement of the national economic health because it covers 80% of the workforce employed in manufacturing, goods, and construction. These industries contribute to gross domestic product (GDP), which, in turn, significantly impacts financial markets.
Read on to find out why non-farm payrolls (NFPs) matter and how you can trade them.
When Exactly Will the Non-Farm Payrolls (NFP) Report be Released?
NFP data is typically released on the first Friday of every month at 08.30 New York time, which is 13.30 GMT. Although dates can vary due to public holidays, prepare for potential market volatility around this time.
What’s Included in the Non-Farm Payrolls (NFP) Report?
There are several parts of the report that traders need to watch out for:
1. Unemployment Rate: This is released as the percentage of the total workforce that is unemployed but actively seeking work. Its long-term average is around 5.5% and hit an all-time high during the coronavirus crisis at 14.7%.
2. Average Hourly Earnings: Wage growth is a component of the Fed’s mandate on inflation and stable prices. Strong earnings may show economic health, whereas weak wages could signal falling consumer activity.
3. Sector Growth: Data shows which areas of the economy are expanding or contracting month-on-month and on an annual basis. This will ultimately impact job gains and unemployment.
4. Revisions to Prior NFP Figures: This part of the data can often be overlooked in the excitement of the current headline print. The scale and complexity of the data mean there can be extensive revisions. The BLS also revises the month before the previous, known as the two-month net revision.
Why Do Non-Farm Payrolls (NFPs) Matter?
NFPs are important as policymakers at the Federal Reserve will use all the available data to analyse the current state of the economy. Whether positive or negative, the overall number of jobs represents an essential indicator of the strength of the US economy. This helps them make decisions about future monetary policy, as employment is part of the central bank’s mandate.
The report provides valuable insights into the labour force that could directly impact policy, interest rates, and future levels of economic activity. This will affect the stock market, the value of the dollar, US Treasuries, and commodities.
For example, a strong report may be taken as a sign of a robust economy, which, in turn, can lead to inflationary pressures. A series of similar data points could prompt an interest rate hike, with repercussions across all financial markets.
Traders should also pay close attention to the weekly jobless claims data for broader insight into the economy. This report provides an estimate of the number of individuals who filed for unemployment benefits in the previous week, offering insight into the health of the job market.
How Does Non-Farm Payrolls (NFP) Affect Forex and Trading?
With so many investors and traders watching the data release, NFP can see sharp two-way price action. Much depends on how close the headline print is to analysts ‘ estimates ahead of the announcement. This means the absolute figure isn’t as crucial as the expectations.
Let’s take an example where the Fed currently maintains a hawkish stance on policy and is looking to raise interest rates.
NFP shows that 687,000 new jobs were created in the prior month. This doesn’t give us enough information to trade off.
But if we know that the consensus expectation for the headline number was 400,000 new jobs, then this is a positive upside surprise, as it surpasses analyst estimates.
- A good NFP report, where the headline number beats expectations, revisions are strong, and unemployment falls, may cement a quarter-point rate hike.
- This is because the US economy is growing and should attract investment, driving up the price of the U.S dollar and growth sectors of the stock market. This will affect major forex pairs after NFP, like EUR/USD, GBP/USD, and USD/JPY.
- Other currencies that thrive in a growing global economy may also be impacted. AUD, NZD, and CAD are typically attractive in this environment. Physical commodities, too, should find buyers as consumers require more oil, energy, and metals.
- On the flip side, risk-averse currencies with strong safe-haven qualities, such as JPY and CHF, may be sold. Other assets, like gold, may be shunned because their performance is not correlated with a growing economy.
How to Trade During the Period of the Non-Farm Payrolls (NFP) Release?
The NFP report brings with it increased volatility. This means prices can move quickly in different directions. There is also a liquidity squeeze in the lead-up to the release, which can widen spreads.
It is generally advisable not to trade immediately after the release itself. Prices will typically whipsaw back and forth as trading algorithms test market levels and liquidity.
There are numerous forex trading strategies that traders use after NFP. One approach is to wait for the initial knee-jerk reaction and fade the move. Another is to see if the trend continues and breaks through previous support and resistance levels.
The volatility that NFP creates means it is always wise to have a risk management strategy in place before you trade.
For a detailed breakdown of specific strategies and risk management techniques when trading NFP in the forex market, read our dedicated NFP Forex Trading Guide
