NFP Trading: How the Non-Farm Payrolls Report Can Impact Market Moves

Non-Farm Payrolls Report; Why Does it Matter in Trading?

From trading desks at banks and hedge funds to stay-at-home retail traders and investors, the US Employment Situation Report is a release that market participants watch closely each month. The report can widely influence price action across key asset classes, such as Currencies, Stocks, Bonds, and Commodities, as well as impact interest rate decisions from the US Federal Reserve (Fed). 

Released by the US Bureau of Labour Statistics on the first Friday of every month at approximately 1:30 pm GMT, the report includes the US Non-Farm Payrolls data (NFP); this measures the change in employed people in the previous month (as a note, the release is subject to revisions). 

Data are available on all economic calendars, providing ‘actual’, ‘previous’, as well as economists’ median ‘forecasts’. Premium calendars will also offer estimate range high and lows, which are essential for many investors; this is particularly important for short-term traders who ‘scalp out of economic data’. Volatility can increase exponentially in months where actual and forecasted data deviates significantly.

The objective of the Employment Situation Report is to shed light on the health of the labour market in the largest economy in the world. A healthy and growing labour force should translate into more spending, and spending drives economic activity. A growing labour market also increases the chances of the Fed stepping in and increasing interest rates to lessen the risks of overheating the economy, an action potentially increasing demand for the US dollar (USD). This may also intensify volatility in other major currency pairs (for example, EUR/USD and GBP/USD), as well as move the dial for Stock and Bond markets. 

Breaking Down the NFP Release

The Employment Situation Report is delivered as a comprehensive account incorporating two separate surveys: the Household Survey (or ‘Current Population Survey’) and the Establishment Survey (or ‘Current Employment Statistics Survey’).

The NFP data are found in the report's Establishment Survey, which supplies information on employment and average hourly earnings in ‘non-agricultural business establishments’ – that is, private non-farm businesses, such as factories and offices. The Establishment Survey's sample is also much broader than the Household Survey, representing more than 600,000 individual worksites. The unemployment rate can be found in the Household Survey, conducted using a sample survey of approximately 60,000 private households.

The NFP figure (or payroll survey) reflects the total number of jobs created (or lost) for full-time and part-time paid employees in the US in the previous month (up to the reference week, usually including the week that contains the 12th day of the calendar month). For example, a release showing +100,000 jobs created means that 100,000 jobs were gained in the prior month; conversely, -100,000 would mean 100,000 jobs were lost.

US Non-Farm Payrolls – LSEG Datastream

Trading the NFP 

While some traders recommend avoiding potentially high-impact news events (sometimes called ‘tier-1 risk events’), many professional traders see these releases as trading opportunities. 

You will find that steadfast technical analysts tend to circumvent economic data releases, and for good reason. Incomplete knowledge of the macroeconomic narrative would leave a trader relying just on technical levels, which may be fine for swing or position traders but would be challenging for scalping or day trading. However, you can trade the NFP report if you possess knowledge of the macroeconomic landscape, such as the central bank’s forward guidance (what the Fed is watching or wants to see to increase [hawkish] or decrease [dovish] interest rates), and the overall economic climate. 

For example, the Fed is projecting a slower pace of rate cuts in 2025, and investors are also anticipating a similar rate-cut trajectory. This alone is bullish for the USD and US Treasury yields (and likely bearish for Stocks and Bonds). With this being the case, following a strong jobs report – higher job growth, lower unemployment, and increasing wages – this could spark demand for the USD and US Treasury yields (and potentially weigh on Stocks and Bonds) as this adds to the probability of the central bank keeping interest rates higher for longer, particularly for 2025. On the other hand, should lower-than-expected jobs data emerge, this can have the opposite effect and send the USD and US Treasury yields lower (possibly lifting Stocks and Bonds) as the Fed is more likely to cut rates.

When the central bank’s path aligns with the economic data, and when data broadly deviates from economists’ estimates, the higher probability trades tend to unfold. For instance, imagine that ahead of a US jobs report, the median estimate was for an increase of 175,000 new jobs to have been created (along with policy expected to remain higher for longer). Now imagine the release reported a 200,000 increase in jobs and surpassed the estimate range high (as well as unemployment ticking lower and wages increasing and exceeding estimates). This is a prominent ‘beat’ on expectations and would likely trigger a marked rally in the USD and US Treasury yields (and draw Stocks and Bonds south). 

However, it is worth observing that trading NFP releases is not always straightforward. Traders must keep an eye on positioning (determining whether your traded market is overstretched) and understand what is important for the Fed. At the time of writing, the USD is heavily overextended to the upside and the Fed is closely watching inflation and jobs data. It is also key to understand that technical analysis plays a pivotal role in entering and exiting trades.

 FAQs:

1. What is the US NFP Report?

Found within the Establishment Survey of the US Employment Situation Report, the US NFP figure measures the change in employed people in the previous month in non-farm businesses. 

2. Why does the NFP report matter in trading?

The NFP report is one of the most market-moving data released each month and can widely influence all key asset classes, such as Currencies, Stocks, Bonds, and Commodities.

3. How to trade the NFP report?

A common way to trade the NFP report is to trade out of the event. This means waiting for the report to be released and trading based on the data. Traders will also likely incorporate positioning data and technical analysis to generate trading decisions, as well as have a clear understanding of what the Fed is watching.