The non-farm payrolls report the monthly US employment figures, and it is a significant indicator of the health of the US economy and one of the more eagerly-awaited key economic indicators in the financial markets.
It is intended to represent the total number of paid workers in the US, with the exception of farm, government and private-household employees, plus employees of non-profit organizations. The non-farm payrolls are typically released an hour before the official opening of the US stock market, on the first Friday of each month, although the date will occasionally vary due to a public holiday.
As there are 24-hour sessions for many markets these days, reactions tend to be extremely fast. Read on to get a better understanding and learn why the non-farm payrolls report is particularly important for your trading strategy and how you can access it on our trading platform, Next Generation.
What are non-farm payrolls?
The US non-farm payrolls, or ‘NFPs’, is an official statistic released by the US Department of Labor, usually on the first Friday of every month.
The non-farm payrolls measure the number of people currently in employment in the US and are released along with the US unemployment rate. Both are important yardsticks used by traders and analysts alike to get an insight into the health of the US economy. Specifically, the non-farm payrolls measure the number of people in employment in all businesses across the country, excluding agricultural, local government, private household and not-for-profit sectors.
The non-farm payrolls are considered to be one of the most robust measures of the health of the US economy, as they can give an insight into future important data releases such as gross domestic product (GDP) figures and manufacturing data. This is because the higher the number of people in employment in a country, the better its economic output can be expected to be at the end of the quarter and vice versa.
For instance, consistently falling non-farm payroll figures could indicate weakness and the risk of a possible recession, whereas consistently robust data on a month-on-month basis could show a strengthening economy, possibly even indicating that the economy may be out of danger of falling into a recession.
Non-farm payroll dates
Analysts release forecasts ahead of the release of the non-farm payrolls announcement, indicating a predicted number. When the payroll figures come in above expectations, or miss estimates on their release, it could take the markets by surprise and have a positive or negative impact on the US dollar and headline stock indices such as the Dow Jones Industrial Average. For instance, a better-than-expected NFP release could push the US dollar higher against other currencies, whereas lower-than-expected data may put pressure on the value of the US dollar against a basket of other currencies such as the euro, sterling or yen. It is for this reason that trading the non-farm payrolls can form an important aspect of your spread betting or CFD trading strategy.
Non-farm payroll times in the UK
The non-farm payrolls are usually released at 1.30pm (UK time), or 8.30am (EST) on the first Friday of every month and offer trading insights into month-on-month and year-on-year data. Month-on-month shows last month’s number compared to the prior month, while year-on-year shows last month’s figure compared to the same month a year earlier.
Non-farm payroll trading strategies
With so many investors watching this data release, the payrolls can result in some sharp moves in the financial markets, both up and down, depending on how close the actual figure is to estimates made ahead of the announcement. This makes the payrolls a popular trading opportunity for many forex and indices traders.
There are several techniques used when it comes to trading the non-farm payrolls, with popular strategies including fading the initial move and trading the trend
Fading the initial move
One approach is to wait and see how the markets react when the news comes out. Since market moves can be volatile, there could often be an initial knee-jerk reaction when the data is first released. This can be combated by adopting what’s known as ‘fading’ the initial move.
For instance, let’s assume the payrolls have exceeded expectations and are therefore expected to boost the value of the US dollar against a basket of other major currencies including the pound. Instead, the GBP/USD exchange rate rallies as soon as the announcement comes out, and the pound initially moves sharply higher against the dollar.
Fading such a move involves waiting for this initial rally to run out of steam, which may only take a few minutes. Once that’s happened, traders could then short-sell GBP/USD, placing a stop-loss order over the high for the rally. The assumption is that the trader is expecting a move back to where the market was immediately before the non-farm payrolls were released.
This also works if the market drops quite aggressively once the number has been released. It would be useful, however, to wait and see if the market pauses and then buy the position with a stop-loss order under the most recent low. Learn more about forex trading with CMC Markets.
Trading the trend
Another approach is where traders assume the initial market reaction was actually correct. If the market has moved sharply after the non-farm payrolls release, then one assumption is that this is the start of a trend for the day ahead.
Traders often tend to look at previous reference points to confirm a new trend. For example, has the move broken the previous day’s high? If so, some would see this as a significant change in market sentiment and expect the markets to move higher.
Another approach is to place a trade a few minutes before the figure is released. While this could result in a healthy profit, it is something of a ‘coin-flip’ on market direction as the markets can sometimes initially react contrary to general expectations. Risk management enables you to close the position if that view proves to be incorrect.
Source : CMC Markets