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

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

Reading time: 7 minutes

If there is ever an economic indicator that traders, investors and analysts are intensely aware of each month it is the non-farm payrolls report (NFP), released on the first Friday of every month at approximately 1:30 pm GMT. Data are available on all economic calendars, providing actual and previous values as well as economists’ median forecasts; premium calendars will also provide economists’ estimate range high and lows, which are essential for many investors.

Together with inflation and economic growth ([GDP] Gross Domestic Product), the US Employment Situation Report is bookmarked by market participants, from large trading desks at banks and hedge funds to stay-at-home retail traders and investors. It would be an understatement to say that the release can elevate volatility across the financial markets, particularly in months where actual and forecasted data deviates significantly. 

The US Employment Situation Report

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 translates into more spending and more spending drives economic activity (GDP). A growing labour market also increases the chances of the US Federal Reserve (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) and increasing volatility across other major currency pairs (EUR/USD and GBP/USD, as an example), as well as pushing equity and bond markets lower. After all, a central bank’s job is to maintain a balance between stable prices and growth. This is why it is such an important release and traders pay close attention to the numbers.

Breaking Down the NFP Release

Released by the US Bureau of Labor Statistics (BLS), the US Employment Situation Report is delivered as a comprehensive account that incorporates two separate surveys: the Household Survey (or Current Population Survey) and the Establishment Survey (or Current Employment Statistics Survey).

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

It can be found in the Establishment Survey of the report, supplying information on employment and average hourly earnings in ‘non-agricultural business establishments’—think about private non-farm businesses, such as factories and offices. The sample is also much broader in the Establishment Survey, representing a sample size of more than 600,000 individual worksites. As a note, the release is also subject to revisions.

The unemployment rate can be found in the Household Survey which conducts a sample survey of approximately 60,000 private households.

Trading the NFP Release

While some traders recommend steering clear of potentially high-impacting news events, many professional traders see tier-1 risk events 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 landscape would essentially be a 50/50 bet if trading any potentially high-impacting economic release. However, possessing knowledge of the macro space, such as the central bank’s guidance (what the Fed is watching or wants to see to increase [hawkish] or decrease [dovish] interest rates) and the overall economic climate, you can trade the NFP report. 

As an example, the Fed actually projects three rate cuts in 2024 as inflation nears the 2% inflation target. This could have the USD sold in the event of notably lower-than-expected economic data releases as lower employment equates to lower spending and less upward pressure on prices (inflation). Soft economic data evidently creates trading opportunities and adds weight to the probability of the central bank easing monetary policy. Investors, particularly for 2024, will also likely increase bets of a rate cut sooner rather than later on the assumption that the central bank no longer has to leave the Fed funds rate in restrictive territory. On the other hand, should notably better-than-expected NFP data emerge, this can have the opposite effect and lift the USD and US Treasury yields as the Fed is then likely to leave the overnight rate at its terminal level for longer, consequently boosting appeal for the dollar.

When the central bank’s path aligns with the economic data, this is where the higher probability trades tend to unfold. For instance, imagine that ahead of the NFP event, the median estimate was for an increase of 175,000 new jobs in the current economic climate (policy easing expected), and the release reported only a 130,000 increase and surpassed the estimate range low. This is a prominent miss on expectations and would likely trigger a marked selloff in the USD and lift the stock market and bonds (yields lower) as markets would interpret this as a bearish sign for the dollar.