Introduction to Non Farm Payrolls
What is the non-farm payrolls report?
The non-farms payroll report (NFP) is the monthly release of data on the 80% of the US workforce employed in manufacturing, construction and goods.
As the name suggests, it does not include those who work on farms, and also excludes private households, non-profit workers and government employees.
Why is the non-farm payroll report important?
The non-farm payroll release gives an invaluable insight into the state of the world’s biggest economy, showing how US business is performing and offering an indication of where the Federal Reserve might take interest rates in the near future.
The overall number of jobs added or subtracted is an indicator of the health of the economy as a whole, and are part of the Federal Reserve’s mandate on employment – so the FOMC will pay attention to NFP figures when deciding whether to raise or lower rates.
For example, a high number of jobs can be taken as a sign of inflationary pressures, which may lead to an interest rate hike. A fall in the number, meanwhile, may indicate a declining economy, increasing the chances of a rate cut.
Interest rates have a major part to play in the movements of forex, stocks and commodities, so the non-farms report can reverberate across global markets in a big way.
How to trade non-farm payrolls
Trading non-farms payrolls can present the opportunity for increased profits on a variety of markets, but the announcement can cause volatility, increasing risk.
Prior to the release, economists will attempt to predict what the headline NFP number will be, usually arriving at a consensus estimate. The market fallout from the release can then be magnified depending on the closeness of the estimate to the actual figure.
Some of the markets that are likely to be most affected are:
- Forex: A healthy US economy will attract investment from around the word, driving up the price of the US dollar. This affects major currency pairs, such as GBP/USD, EUR/USD and AUD/USD
- Indices: Strong employment is a sign that businesses are doing well – but a strong dollar can negatively affected US indices such as Dow Jones, the S&P 500 and the NASDAQ
- Commodities: If it looks like the US economy is performing poorly, traders may turn to safe havens, such as gold and silver
Example: Oct 8,2021 Results were significantly below Forecast - 194k of new work places against 490k anticipated. As results - it shows that USA economy is weaker than expected - hence USD becomes weaker - causing all the assets trading against USD to go Up. Below is the screenshot of Figures released on the day and Graphs with results of NFP on different markets.
Please Note: that These moves happen exactly after the announcement of NFP and usually playout with in an hour - So very quick profits can be secured by trading on fundamental economic data that is regularly released by USA government.