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Nonfarm Payrolls Explained

Beginner

The Nonfarm Payrolls data is traditionally seen by traders as the most important economic data of the month. It records how many jobs were added in the United States in the prior month. The more jobs that are being added, the stronger the outlook for the US economy.

Nonfarm Payrolls (NFP) data is announced as part of the US Employment Situation report which is monthly official labor market data from the US Bureau of Labor Statistics (BLS). Nonfarm Payrolls are traditionally announced on the first Friday of the month and always at 08:30 Eastern Standard Time.

The jobs data is important because it is a key gauge of the progress of the US economy. It helps economists and analysts to formulate their outlook for the Federal Reserve’s monetary policy.

Market Reaction

If the US economy generates strong jobs growth, it is an improving economy. This is positive for US assets. Subsequently, US Treasury yields, the US dollar and US equities will move on the NFP data.

Nonfarm Payrolls are also important because the US is the largest economy in the world. Therefore broad market sentiment will be impacted and international markets will also move. Other markets that will are affected by NFP include commodities such as gold and major foreign equity markets.

The definition of Nonfarm Payrolls

The Nonfarm Payrolls data covers the majority of workers in the US. The name suggests that farm workers are excluded from this. This is due to the seasonality of farm work. However, other job sectors are also excluded from the BLS data. These include:

  • Some government workers – non-civilian employees such as the military and some government agency workers.
  • Private households – domestic household employees
  • Proprietors – such as self-employed workers
  • Non-profit employees

Breaking down the Employment Situation report

Whilst the headline jobs growth (NFP) is considered the most important measure, traders will also be looking at other components of the Employment Situation report. This helps to give them an overall picture of the labor market. Here is what else to look out for:

  • Unemployment – the rate of unemployment is important as this is something that the Federal Reserve monitors when formulating monetary policy.
  • Participation Rate – the percentage of the population that is active in the labor market helps to paint a picture of the health of the economy.
  • Average Hourly Earnings – wage growth can be an important factor for inflation analysis. If “real” wages (wage growth minus inflation) are positive then workers are improving their financial position. They would then have more money for consumption.
  • Hours worked – this is important in analysing levels of productivity in the economy.

How to read the NFP data

There are several factors to consider when looking at the Nonfarm Payrolls data:

  1. Running to stand still – it is estimated that the US economy loses between 100,000 and 150,000 jobs every month due to factors such as death and retirement. These jobs need to be replaced for the economy just to stand still. Subsequently, if the US generates upwards of 200,000 jobs or more it is seen to be expanding. With growth below 100,000 jobs, the labor force is likely to be shrinking, and this can be a sign of a contracting economy.
  2. Expectations are everything – As ever, with any data, market expectations are important. Beating the consensus will tend to drive a decisive market reaction.

Watch the spike!

Trading Nonfarm Payrolls can often be more of an art than a science. Markets will tend to spike on the data announcement. The first sharp move will usually be in the direction of the headline NFP surprise. However, these spikes will often then start to retrace some or all of the original move.

Algorithm trading (automatic orders) can drive the original market move. However, this is not always a lasting market response. The Employment Situation report should be taken a whole package of data. This will often generate a sustaining impact on markets.

These spikes can often begin to retrace after just a few minutes. How far they retrace can often depend upon the extent of the data surprises in the Employment Situation report.

Trading Monetary Policy decisions

Under normal market conditions here is how markets are likely to react:  

Headline NFP jobs growthLikely market reaction
  
Higher than forecast NFPTreasury bond yields move higher
 USD strengthens
 Domestic equities rally
 Gold falls
  
Lower than forecast NFPTreasury bond yields move lower
 USD weakens
 Domestic equities fall
 Gold rallies

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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