03 March 2015
Sales Trader, Client Trading Services, Saxo Capital Markets
US non-farm payroll data has the power to move markets – but why? Here we explain why this metric is monitored so closely by market participants.
What is Non-Farm Payroll (NFP)?
The non-farm payroll (NFP) data is released on the first Friday of every month by the US Bureau of Labor Statistics, along with other employment data such as unemployment, job growth and payroll data, though traders consider NFP to be the most important.
Why is NFP the most important employment data?
NFP data covers the number of private jobs gained or lost in the US during the previous month. It excludes general government employees, private household employees, employees of non-profit organisations that provide assistance to individuals, and farm employees.
The farming industry is not included because its seasonal hiring distorts employment numbers around harvest time - hence the term "non-farm payrolls".
The jobs market has become a key area of focus for investors since the Federal Reserve begun tying monetary policy with economic performance. Photo: Shutterstock.
Why is it an important economic indicator?
The NFP is one of the most important economic indicators observed by financial markets, particularly because it relates to the world's biggest economy. If NFPs are rising then it is a sign that the US economy is in good health.
In its simplest form, employed people have more money to spend (and take less from state aid), which increases product and service demand, which increases corporate profits, which leads to wage growth – and the cycle continues fuelling economic growth.
Economic growth is good for financial markets. If unemployment grows – NFP declines – this tends to have a constraining effect on the US economy, which is bad for financial markets.
It is worth remembering that NFPs are subject to revisions, both up and down, and those revisions can be equally important.
Why should traders care?
Improving NFP data is generally positive for all asset classes. If traders are anticipating good NFP data they could be bullish equities and the dollar in expectation that the market will rise with demand after the announcement. The opposite may be true if NFP is expected to decline.
In the past, the NFP report was more typically a forex market-moving event. However, since the credit crisis employment figures have been extricably linked to the Federal Reserve monetary policy, so it has become a market-moving event across all asset classes.
What's the outlook for the next NFP announcement?
The market is currently pricing in an interest rate rise in the US in the end of 2015 and recent comments by the Federal Reserve are supportive of this assessment. Increasing NFP data could add weight to the argument to raise rates in that timeframe.
If inflation was rising along with employment then the Fed would have few reasons left not to raise interest rates, something which remains an unknown quantity in regards to how it might impact the economic recovery. However, inflation remains muted because of declining energy prices and deflation is currently more of a threat. But the more the NFPs improve the tougher it will be for the Fed to hold off raising interest rates.