The NFP report is one of the most anticipated economic releases of the month, as it offers an in-depth look at the monthly employment situation and trends in the United States.
Because data from this report is one of the biggest market movers in the financial markets, we’ll show you how and why you should trade the NFP report in this article.
Understanding the NFP report
Published the first Friday of every month at 8:30 a.m. (ET) by the U.S. Bureau of Labor Statistics, the NFP or Non-Farm Payroll, also called the Employment Situation, discloses key information from the previous month about the job market in the United States.
The NFP accounts for about 80% of American workers, excluding agricultural employees, government employees, private household employees, and employees of non-profit organizations.
There are 3 key measures about the Employment Situation in this report:
- the number of jobs created or lost
- the overall unemployment rate
- the average number of hours worked
You can also get additional metrics of employment such as:
- the breakdown of the employment growth by activity sector, sex, race, and age
- the labor force participation rate
- the employment to population ratio
- the number of people not in the labor force who currently want a job
- some other measures of labor under-utilization
- the breakdown of the average workweek by industries
- the number of unemployed persons by reason and duration of unemployment, as well as by class of worker
- the number of employed persons by class of worker and part-time status
Knowing the reasons why this report has such an impact on the markets
The NFP represents about 80% of all US employees who contribute to the GDP of the country, which means that it provides true insights into the way the employment market evolves in the United States and its consequences on US growth.
Positive and high job creation usually means that the economy is doing well. Companies are hiring new people because they believe in the future, which means that more people receive an income they can spend on things, supporting consumer spending. When growth is boosted by private spending, companies might invest more money to encourage their development, increasing the need to hire more people to meet the demand.
As this situation is globally positive for growth, it is usually positive for the markets, as investors will put money in American assets because they anticipate robust growth. While employment on the rise is usually good news, rising wages might be a concern if they reduce purchasing power.
If they’re rising too fast and remain high for a while, it might trigger higher interest rates to fight unsustainable inflation. But higher rates could have negative effects on growth, as it means that it is more expensive to borrow money.
So, by providing reliable information about the trends in the US employment market, as well as inflation in the country, this report provides crucial information for Fed policymakers to know if they are on the right track in reaching their dual mandate of price stability and maximum sustainable employment.
The information about how well the American economy is doing, as well as what the future holds in this report, therefore helps the central bank to decide whether or not the American monetary policy needs to shift.
By increasing or decreasing interest rates, the Fed modifies the costs of borrowing, which strongly impact the markets. So, closely following this economic report helps traders and investors to anticipate Fed’s move and consequently rebalance their portfolios.
Trading the Employment situation report
You can take into account the long-term consequences of a new monetary policy cycle on the different asset classes by considering the long-term perspective to confirm the trend or a change in the market trend. It can also help you focus on assets that will benefit from higher or lower interest rates, depending on your preferred scenario.
Another more popular way to trade the NFP report is over the short-term, as the release of the NFP report usually triggers higher volatility - especially in the Forex, indice, and bond markets. Traders can exploit this volatility if they follow a short-term trading strategy, like news trading through scalping or day trading techniques.
It often all comes down to the market’s expectations and reactions to the numbers published in the report - which sometimes doesn’t really make sense, as bad news can be good news (and vice-versa).
Traders can enter the market before the publication if they have a directional bias and expect the market to go a specific way once the report is published. The other method is to trade the market movement after the publication, depending on whether the numbers confirm or go against market expectations, and how far above or below these expectations numbers are. Traders also often look at the actual numbers compared to the previous month as well, to see if the previous month’s number was revised up or down.