Non-farm payrolls (NFP) is one of the most important and widely-followed economic indicators in the United States. It measures the change in the number of people employed in the non-farm sector of the economy during the previous month, excluding workers in farming, private households, non-profit organizations, and the military. The data is collected by the Bureau of Labor Statistics (BLS) through a survey of about 142,000 businesses and government agencies, covering approximately 689,000 individual worksites. The NFP report is released on the first Friday of every month, usually at 8:30 a.m. EST.
Why is NFP important?
NFP is important because it reflects the health and strength of the labor market, which is a key driver of economic growth and consumer spending. A higher than expected number indicates that more people are finding jobs, which means more income and spending power for households. This can boost the demand for goods and services, stimulate business activity, and increase tax revenues for the government. A lower than expected number suggests that fewer people are finding jobs, which means less income and spending power for households. This can reduce the demand for goods and services, dampen business activity, and decrease tax revenues for the government.
NFP is also important because it influences the monetary policy decisions of the Federal Reserve (Fed), the central bank of the United States. The Fed’s main goal is to maintain price stability and maximum employment in the economy. To achieve this, the Fed adjusts the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The federal funds rate affects the cost and availability of credit in the economy, which in turn affects the spending and investment decisions of consumers and businesses. The Fed monitors the NFP data closely to assess the labor market conditions and the inflationary pressures in the economy. A higher than expected number may signal that the economy is growing too fast and inflation is rising, which may prompt the Fed to raise the federal funds rate to cool down the economy and prevent overheating. A lower than expected number may signal that the economy is growing too slowly and inflation is falling, which may prompt the Fed to lower the federal funds rate to stimulate the economy and prevent deflation.
How does NFP affect the stock market?
NFP affects the stock market in several ways. First, it affects the expectations and sentiments of investors, who use the NFP data to gauge the current and future state of the economy and the profitability of companies. A higher than expected NFP number may boost the confidence and optimism of investors, who may anticipate higher earnings and dividends from companies. This may increase the demand for stocks and push the stock prices higher. A lower than expected NFP number may reduce the confidence and optimism of investors, who may anticipate lower earnings and dividends from companies. This may decrease the demand for stocks and pull the stock prices lower.
Second, NFP affects the interest rates and the cost of capital in the economy, which affects the valuation of stocks. A higher than expected NFP number may increase the likelihood of the Fed raising the federal funds rate, which may increase the interest rates on bonds, loans, and mortgages. This may increase the cost of borrowing and investing for consumers and businesses, which may reduce the spending and investment in the economy. This may also increase the discount rate, which is the rate used to calculate the present value of future cash flows from stocks. This may decrease the value of stocks and lower the stock prices. A lower than expected NFP number may increase the likelihood of the Fed lowering the federal funds rate, which may decrease the interest rates on bonds, loans, and mortgages. This may decrease the cost of borrowing and investing for consumers and businesses, which may increase the spending and investment in the economy. This may also decrease the discount rate, which is the rate used to calculate the present value of future cash flows from stocks. This may increase the value of stocks and raise the stock prices.
Third, NFP affects the exchange rates and the competitiveness of companies in the global market. A higher than expected NFP number may strengthen the US dollar, which is the currency that the NFP data is reported in. This may make the US exports more expensive and less competitive in the foreign markets, which may reduce the sales and profits of US companies that rely on exports. This may also make the foreign imports cheaper and more attractive in the domestic market, which may increase the competition and pressure on US companies that face imports. This may decrease the earnings and dividends of US companies and lower the stock prices. A lower than expected NFP number may weaken the US dollar, which is the currency that the NFP data is reported in. This may make the US exports cheaper and more competitive in the foreign markets, which may increase the sales and profits of US companies that rely on exports. This may also make the foreign imports more expensive and less attractive in the domestic market, which may reduce the competition and pressure on US companies that face imports. This may increase the earnings and dividends of US companies and raise the stock prices.
How to trade during NFP reporting?
Trading when NFP is scheduled to be released can be challenging and risky, as the NFP data can cause high volatility and unpredictability in the stock market. The NFP data can also deviate significantly from the expectations and forecasts of analysts and economists, which can create surprises and shocks in the market. Therefore, traders need to be well-prepared and well-informed before trading NFP. Here are some tips and strategies for trading NFP:
Check the consensus and range of expectations for the NFP data
They are usually available from various sources such as news outlets, financial websites, and economic calendars. The consensus is the average or median estimate of the NFP number by a group of analysts and economists. The range is the difference between the highest and lowest estimate of the NFP number by the same group. The consensus and the range can help traders to anticipate the potential market reaction and direction based on the actual NFP number. Generally, the larger the deviation of the actual NFP number from the consensus, the stronger the market reaction. The wider the range of expectations, the higher the uncertainty and volatility in the market.
Analyze the historical patterns and trends
The data is usually available from the BLS website and other sources. The historical data can help traders to identify the seasonality, the volatility, and the correlation of the NFP data with other economic indicators and market variables. For example, traders can compare the NFP data with the unemployment rate, the wage growth, the inflation rate, the GDP growth, the Fed policy, the bond yields, the dollar index, and the stock indices. Traders can also look for any revisions, anomalies, or outliers in the NFP data that may affect the market interpretation and reaction.
Monitor the market conditions and the price movements before and after the NFP release
The market conditions and the price movements can help traders to determine the entry and exit points, the stop-loss and take-profit levels, and the risk-reward ratio for their trades. Traders can also use different types of charts, such as candlestick, bar, line, or point-and-figure, to visualize the price action and identify the support and resistance levels, the trend lines, and the chart patterns.
Conclusion
NFP is a vital economic indicator that measures the change in the number of people employed in the non-farm sector of the economy during the previous month. NFP reflects the health and strength of the labor market, which affects the economic growth, the consumer spending, the monetary policy, the interest rates, the exchange rates, and the stock market. NFP can cause high volatility and unpredictability in the stock market, as the NFP data can deviate significantly from the expectations and forecasts of analysts and economists – in turn sometimes causing panic in the markets.
