Trading the Non-farm payroll (NFP) report

What is the NFP report? 

Non-farm payroll (NFP) is a monthly report on nonfarm employment numbers in manufacturing, construction and goods, which totals to around 80% of US jobs. It contains information related to the unemployment rate, job growth, and other key employment statistics. The report does not include US jobs in private households, the federal government, nonprofit organisations, and as the name suggests, farm workers. Data within the Non-farm payroll report is measured by the Federal Bureau of Labor Statistics through the Employment Situation report and is typically released on the first Friday of every calendar month. 
 

Why is the Non-farm payroll important? 

The report is an important economic indicator of how the US economy is performing, as it reports on the number of people employed or unemployed in the US. It is considered one of the most consistent news announcements that can cause large rate movements that result in volatile markets, particularly affecting major currency pairs in forex. As a stand-alone report, it is important in its own right, as an indication of whether the economy will strengthen or decline; for example, if the unemployment rate is high, it could indicate a declining economy. 

However, it is also an important piece of a jigsaw when looking at other key factors that influence the US economy, such as economic policy-making. Interest rates, for example, are set by the Federal Open Market Committee (FOMC) in the monthly Federal Reserve meeting, and the board will look at the Bureau of Labor statistics' NFP figures when deciding if they are going to lower or raise interest rates in their monetary policy. Changing interest rates will have a big impact on markets such as forex, commodities and stocks, and can cause big volatility. 
 

Non-farm payroll report calendar 
 

The NFP is released typically every first Friday of the calendar month at 13.30pm (GMT). 
 

How does the NFP effect the markets? 
 

The NFP report is important to traders as it can be a cue to analyse how other factors will adapt, such as the Federal Reserve and other government agencies, to attempt to move the economy in a certain direction. It is just one factor of many that can act as a catalyst for volatility and market price changes. 

The NFP affects the financial markets because it affects other factors within the US economy. The government will adapt policies to combat issues within the economy such as inflation or recession. If the NFP report indicates employment is dropping, it could indicate that the economy is declining. This, in turn, will prompt the Federal reserve to adjust interest rates to restore balance. If rates adjust, this will trickle down into the markets  
 

Trading on Non-farm payrolls   
 

Firstly, monitor the report. The primary focus of the NFP report are the employment figures, mainly on jobs added or reduced. However, there are smaller components you can also watch out for when trading. 

• Take note of sector specific data. If the NFP report shows a decline in employment, traders will monitor which industries or sectors this decline is coming from. It could indicate the sector itself is struggling, which can have a knock-on effect to stocks and shares. 

• Don’t just focus on figures, also focus on earnings. If average hourly earnings have dropped, but the employment figures are stagnant, this could also indicate a decline. It could also point to trouble where we could see the workforce output fall as employees could leave the workplace due to declining earnings. On the other hand, higher earnings could indicate wage inflation. 

• Monitor previous reports. As the scale of the NFP report is so large, it is often subject to large revisions of the previous headline figures. If this happens, it could cause a sudden jolt in the markets. 

When trading on the Non-farm payroll report, economists will try to predict what the headline figures (or NFP number) will be on a monthly basis, while also monitoring other reports, rates and financial events. Trades will then be placed on whether they think this result will make markets go up or down. The markets most affected by the NFP report are forex, indices and commodities. 

A declining report may not always act as bad news, if you are trading with contracts for difference (CFDs). With CFDs, you can trade volatile markets whether they go up or down, you just need to correctly predict which way the market will go. 

You can use risk management tool such as stop loss and take profit to minimise your risk, but as always with trading, trade with caution. Plan your strategy, monitor reports such as the NFP and take advantage of our built-in economic calendar to monitor other major financial events on our award-winning app ThinkTrader.  

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