Key market data explained: The Non-farm Payrolls

The Non-Farm Payrolls (NFP) is one of the most significant economic events data release of the month and is released on the first Friday by the U.S. Department of Labor. It is a comprehensive snapshot of the current state of US employment, and encompasses the total number of paid employees in the U.S. economy, excluding agricultural, government, private household, and nonprofit organization workers. 

Both the numbers that form the report and data trends are of particular interest to central banks, (particularly of course the US Federal reserve), economists, market participants and policy makers, as well as having global interest due to the US position as a leader in the global economy.

Key points of the NFP Data:

• Employment Change: The main figure in the NFP release is the alteration in the total non-farm payrolls compared to the previous month. This statistic indicates whether the U.S. economy is creating or losing jobs. A positive number signifies job growth, while a negative value indicates job reduction.
• Unemployment Rate: The report includes the headline unemployment rate expressed as a percentage of the labour force actively seeking employment but unemployed. A lower unemployment rate usually is perceived as being positive for the economy.
• Labor Force Participation Rate: This metric gauges the proportion of the working-age population either engaged in employment or actively seeking work. Fluctuations in this rate could signify shifts in people’s willingness to partake in the labour market.
• Average Hourly Earnings: The NFP report includes insights into average hourly earnings, reflecting alterations in wage levels. Escalating wages might signify robust consumer spending and potential inflationary pressures.

Market Impact of NFP: 

The release of the Non-farm Payrolls data ranks among the most important economic events in the calendar, with often substantial implications in the financial markets across multiple asset classes. 

The market response to NFP release will be largely dependent on the consensus estimates of each of the numbers (with are theoretically priced into markets to some degree) against the actual numbers released, and how close this is to estimates. 

A figure that is wide of the mark compared to expectations is likely to produce a more severe market response.

Additionally of course, the current state of the economy may increase the significance and alter the response. For example, in an interest rate sensitive environment, where inflation may be higher than desired, a higher number, suggesting that employment markets are robust may give the green light to the Federal Reserve (the “fed”) to tighten rates, and so the market response will reflect that increased likelihood of Fed action.

Generally speaking, the impact and subsequent response will be felt across all asset classes including the following:

1. Forex Market: Pairs involving the U.S. dollar (USD) frequently experience pronounced movements following the NFP data release. Solid job growth and a lower unemployment rate can bolster the USD, while subpar data might result in USD depreciation. Other risk-on currencies such as the AUD, CAD and NZD may fluctuate significantly dependent on whether the data is viewed positively or otherwise.
2. Stock Market: Favourable NFP data can elevate investor confidence in the economy’s strength potentially leading to stock market optimism. Conversely, weaker than expected NFP figures might raise concerns about economic expansion, potentially triggering stock market selling. Obviously, the degree to which this will be the case may be dependent on the individual sector.
3. Bond Market: As previously discussed, strong job growth could raise anticipations of forthcoming interest rate hikes by the Federal Reserve to counter potential inflation, resulting in lower bond prices and higher yields. Conversely, weak job growth could provoke the opposite outcome.
4. Commodity Market:. A thriving job market might imply augmented consumer spending, potentially fostering demand for commodities such as copper and oil. Conversely, tepid job growth might be perceived as threatening commodity demand. Additionally, the inverse relationship between the USD and gold is likely to influence precious metals prices as the USD valuation alters.

However, it’s essential to recognise that market response to data may often be unpredictable and so to try to pre-empt not only what the data may be, but also the market response to such, should be considered as high risk. 

Acknowledging that market reactions can be significant, it would seem prudent for traders (particularly those with a short-term approach) to have the date of future NFP releases in your diary, and take steps to account for the increased risks within your trading decision making.

GO Markets offer regular LIVE sessions during key data releases from Australia and the US, where we observe the immediate market response as it happens across multiple related asset classes. Check out our Education Hub for more information.