Daily Digest:
w/c 17 June 2024: The US data highlight this week is Retail Sales on Tuesday, with global Flash PMI data on Wednesday. Plus on the central bank side we get the RBA, PBoC, SNB and BoE all in play

Trade Nonfarm Payrolls (NFP)


What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) data show the headline jobs growth for the US. It is announced monthly as part of the broader US Employment Situation report which is an update on the state of the US labour market. Here we show a more detailed assessment of what Nonfarm Payrolls are.

Financial markets can move significantly on NFP, so traders pay very close attention to what the data shows. A strong NFP will have positive implications for the US economy, helping US assets to perform well. A weak NFP tends to reflect negatively on the US economy and will drive selling pressure through US assets.

Expectation is key

As with many economic announcements, the expectation (or consensus forecast) is key to the subsequent market reaction:

  • If NFP is above consensus estimates, normally, we can expect USD to be positive on major forex pairs. This will also be positive for risk assets such as equities and commodities.
  • If NFP misses the consensus forecasts, this should be negative for US assets such as the USD, Wall Street and commodities.

The markets that are impacted by NFP

We will now look at the major assets that can be impacted by Nonfarm Payrolls. First of all, here are the primary US assets that will be impacted:

  • US Treasuries –US bond yields are closely linked to the outlook for the US economy. An improved economic outlook will improve risk appetite, meaning Treasuries will be sold (therefore yields move higher) as investors move money out of bonds into higher-risk asset classes.
  • USD – The US dollar will strengthen or weaken with the outlook of the US economy. Better than expected NFP will tend to be USD positive.
  • Wall Street – Changes in the outlook for the labour market reflect changes in the US economy and how consumers are feeling. This plays into the outlook for US equities. More jobs in the economy, means more money for consumers and better corporate prospects, helping to support Wall Street.

Now here are some of the assets that will also move on NFP:

  • Commodities priced in USD (such as gold, copper and oil) – Commodities are priced in USD so will move as the USD either strengthens or weakens. However, NFP is a big gauge of the US economy (the largest economy in the world) and so risk appetite will be broadly impacted. Commodities are a higher-risk asset class that moves on shifts in risk appetite.
  • International equity markets – Where Wall Street leads, other equity markets will tend to follow.

Assessing the impact on Fed monetary policy

During the first signs of economic improvement, upside surprises in NFP are a welcome signal for risk appetite. However, this is not always the case.

When looking to trade NFP, market moves are not always cut and dry. The market reaction will be closely determined by the assessment of Federal Reserve monetary policy. There are times when good news can be bad for certain markets. Subsequently, moves on NFP can sometimes be counter-intuitive. Positive news on the US economy is not always positive for risk appetite. It depends on where the Fed is in its tightening cycle.

When the Fed is pushing ahead aggressively in a monetary policy tightening cycle (due to the economy overheating), positive surprises in NFP drive market expectations of even higher (and more restrictive) interest rates. This can be negative for Wall Street and commodities.

So, when trading NFP, it is important to understand where the Fed is in its monetary tightening to gauge market reaction.

Mind the spike!

When trading around the announcement of NFP there can be a significant spike in market prices. However, often the spikes will then be subject to retracement moves.

These spikes occur as algorithm trading systems move on the headline jobs number (NFP). However, in the Employment Situation report, there are other important data too. The level of unemployment (both U3 and U6 rates), wage growth (Average Hourly Earnings) and the participcation rate are important, as are revisions to previous months of NFP data.

As traders take an assessment of the overall picture of the labour market, the original spikes in market prices can retrace. This is why it is important to understand the bigger picture when trading NFP.


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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