It is not enough to be proficient in technical analysis tools 🛠 for successful trading in financial markets. Fundamental factors have a significant impact on the quotations of many liquid assets, including stocks, currencies, and indices. One of the most important indicators of the economy where traders have plenty of opportunity in its volatility is the NFP (Non-Farm Payroll).
🔎 This article will help you learn more about the NFP and its impact on the financial markets and the most traded assets.
What is the NFP (Non-Farm Payroll)?
The non-farm payroll (NFP) report is a key economic report for the financial markets.🔑 The report represents the number of added jobs over a month, excluding farm jobs, government jobs, employees of NGOs (Non-Governmental Organization), and private household employees.
As such, the NFP report shows the strength 💪 of the US labor market over a given month and often creates enormous volatility in the currency market. The 🏦 Federal Reserve follows the report closely to determine future adjustments to its monetary policy. In general, this parameter covers more than 500 areas of activity. Accordingly, analysts, traders, and investors can use NFP to assess the state of the labor market and in-turn, overall health of the US economy…
The calculation of NFP and the release of the corresponding data is done by the U.S. Bureau of Statistics, which releases preliminary data every first Friday of the month. Since this event has a key impact on the global economy, many economic media are engaged in the publication of relevant statistics.
Why the is NFP so important?
Many market participants, traders, investors, and financial institutions around the world follow the report and base their trading decisions on its outcome. Understanding the NFP report can help traders to take advantage of the large price swings caused by the report. The report can be successfully traded with simple technical tools on short-term timeframes, such as the 5-minute or 15-minute ones. In addition, the NFP data can be taken as a basis for long-term trading strategies in indices, equities, currencies, and commodities.
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📌 This indicator is very important for financial markets, since the wage and tax fund of non-agricultural employment is a significant share of the GDP of the country in which the report is published. Accordingly, a sharp fall or increase in the number of employed people may indicate a dramatic market change, problems in the economy or sustained growth. After all, the labor market reacts faster to economic changes, as well as to possible crisis situations.
Accordingly, a drop in employment of 100,000-200,000 a month in the United States 🇺🇸 could be an indicator of stagnant industry, services, and trade. At the same time, employment growth may indicate an increase in production and retail sales, which is positive for the dollar index and other assets.
Why should you care about the NFP
NFP data can really affect your trading, so you should be on the lookout to not miss a beat when the release occurs.
Active traders are relentless when it comes to monitoring the various key economic indicators intertwined with the market. The reason for this is pretty clear: These indicators allow a trader to identify both minor and major trends with regard to economic growth. 📈
Non-farm payroll data and related statistics can also cause a domino effect, which, in turn, will further affect market performance. When job gains accelerate rapidly, ⏩ the Federal Reserve can relate this data to interest rate changes, potentially pushing through an increase or decrease depending on the circumstances.
As most already know, the 🏦 Federal Reserve has a dual mandate when controlling monetary policy, which can mean that non-farm payroll data can directly influence the biggest impact maker with regard to trading.
Traders face indicator after indicator when it comes to investing effectively; it’s sometimes an information overload. Personal spending and retail sales, along with the CPI and PCEs, have the power to alter the course of the capital markets.
That being said, the significance of non-farm payroll data and how it affects trading should not be ignored.
What assets are usually affected by the NFP report
The NFP data is taken into account by traders not only in the foreign exchange market, but also in stock and commodity markets. Generally, NFP data affects the movement of an extremely wide range of financial instruments.
Assets affected could include:
✅ Dow Jones, Nasdaq and SP500
✅ Crude Oil
✅ Currency pairs with USD
The influence on the stock markets (both on the industrial indices and their constituents) is due to the fact that employment growth is a direct consequence of improved economic expectations from producers. Since expectations of increased demand are, from the producers’ perspective, an opportunity to expand sales, this entails the need to expand production, which leads to increased demand in the labor market. Accordingly, the expansion of production ultimately leads to an increase in GDP. 📈
The fundamental influence on the foreign exchange markets occurs through the U.S. dollar and appears as a consequence of the mechanism of GDP growth described above. Also, an increase in demand in the labor market entails an increase in wages, which additionally positively affects GDP and the national currency through increased consumer spending.
However, consumer preferences for imported goods should be taken into account, as rising incomes can lead to an increase in the share of imports in the trade balance. If the NFP figure is ”unhealthy,” other indicators of economic growth are viewed with some skepticism.
Taking Action! How you could trade around NFP data
➡️ A higher payroll figure is generally good for the U.S. economy, citing more job additions and more robust economic growth. Traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above that figure or the estimated consensus will help to fuel U.S. dollar and other assets gains.
➡️ A lower employment figure is negative for the world’s largest economy and the greenback. If the NFP report shows a decline below 100,000 jobs or fewer, the U.S. economy is likely stagnant and traders will favor higher-yielding currencies against the U.S. dollar and other assets.
- The NFP (Non-Farm Payrolls) report represents the number of added jobs over a month, excluding farm jobs, government jobs, employees of NGOs (Non-Governmental Organization), and private household employees.
- At the time of the NFP release, the “dollar” market begins a strong and often unpredictable movement.
- Higher values than those recorded last month indicate an increase in the number of jobs. This is positive for both the U.S. economy and the dollar.
- A lower reading than last month usually weighs on the dollar because they indicate a decline in the number of employed people.