What is Nonfarm Payrolls (NFP) and Why is it SO Important to Traders?

Regardless whether you are a technical analyst or fundamental trader chances are you have heard about the Nonfarm Payrolls also know as the NFP.

Chances are even if you are not a trader or even in the financial sector, you have heard about NFP!

So what is it and why is it so important to everyone?

Why do they keep talking about this animal on the financial channels? Let’s see.

What is the Nonfarm Payrolls?

Nonfarm payrolls employment is a compiled name for goods, construction and manufacturing companies in the US. It does not include farm workers, private household employees, or non-profit organization employees.

It is an influential statistic and economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market.

The financial assets most affected by the NFP data include the US dollar, equities and gold.  The markets react very quickly and most of the time in a very volatile fashion around the time the NFP data is released.

The short-term market moves indicate that there is a very strong correlation between the NFP data and the strength of the US dollar. Historical price movement data shows a small negative correlation between the NFP data and the US dollar Index.

The Bureau of Labor Statistics releases preliminary data on the third Friday after the conclusion of the reference week, i.e., the week which includes the 12th of the month, at 8:30 a.m. Eastern Time; typically this date occurs on the first Friday of the month. Nonfarm payroll is included in the monthly Employment Situation or informally the jobs report and affects the US dollar, the Foreign exchange market, the bond market, and the stock market.

The figure released is the change in nonfarm payrolls (NFP), compared to the previous month, and is usually between +10,000 and +250,000 during non-recessional times.

The NFP number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry.

Nonfarm Payrolls (NFP) Effect on the Economy

To put it in simple words if the NFP is rising, it means that the economy is healthy and growing. Why? Because the business is growing and hiring employees, further on these employees get paid and have money to spend on goods and services.

Vice versa for a negative readings from the NFP report. The business is shrinking, not hiring (or firing people), hence less people would be employed and have money to spend to help the economy grow.

Nonfarm Payrolls (NFP) Effect on Trading

US employment data showed sustained weakness throughout 2011.

The jobs market has become an area of key focus for investors and market participants since US Federal Reserve ties monetary policies with economic performance, such as the size of quantitative easing program.

For this reason and in this environment the market is particularly sensitive to significant NFP releases.

While the overall number of jobs added or lost in the economy is obviously an important current indicator of what the economic situation is, the report also includes several other pieces of data that can move financial markets:

1. What the unemployment rate is in the economy as a percentage of the overall workforce. This is an important part of the report as the amount of people out of work is a good indication of the overall health of the economy, and this is a number that is watched by the Fed as when it becomes low (generally anything below 5%) inflation is expected to start to creep up as businesses have to pay up to hire good workers and increase prices as a result. This initial rise in prices may mean that workers demand higher wages (especially as the economy reaches full employment) causing further inflation. In macroeconomics, this is known as the price/wage spiral.

2. Which sectors the increase or decrease in jobs came from. This can give traders a heads up on which sectors of the economy may be primed for growth as companies in those sectors such as housing add jobs.

3. Average hourly earnings. This is an important component because if the same number of people are employed but are earning more or less money for that work, this has basically the same effect as if people had been added or subtracted from the labor force.

4. Revisions of previous nonfarm payrolls releases. An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number.

Nonfarm Payrolls 2016 History

If you are curious to see the numbers from the past year here there are:

 

Sources: en.wikipedia.com | tradingeconomics.com

 

 

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