Non-farm payrolls

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. Find out more about how to trade NFP.

Non-farm payrolls components

While you’ll usually see the headline NFP number used in reports, there are plenty of other components that can be just as important to follow. Here’s a quick rundown of what else to watch out for:

• The unemployment rate as a percentage of the overall workforce. This figure is closely watched, as the unemployment rate can influence the Federal Reserve’s assessment of the US economy
• Which sectors the increases and decreases in jobs came from. This gives traders information on which sectors of the economy are up or down, which can be useful in planning future trades
• Average hourly earnings. If there are the same number of jobs, but the average earnings have decreased, the effect is the same as if people had been subtracted from the workforce
• Revisions to previous non-farm payroll releases. This is an important component that can move markets suddenly as traders re-price their growth expectations based on the revisions to previous announcements

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