Nonfarm Payrolls: What to Watch & How to Trade

Day Trading the NFP and Jobs Report

On Friday this week (1st November 2019), the market will receive the nonfarm payroll data from the United States. These reports are released every first Friday of the month.

The common challenge among most new traders is that they don’t know how to read, interpret, and use these numbers in their trading.

In this article, we will look at the most important numbers in the report.

Nonfarm Payrolls

This is the most-watched number by market participants. It basically shows the total number of jobs that were created in the economy in the previous month. The number is known as nonfarm because it excludes people working at the basic level of the agricultural sector.

This week, the market expects that the economy added 90k jobs in October. This will be lower than the 136k jobs that were created in the previous month.

However, this is not the only NFP data that market participants watch. They also watch a revision of the previous month’s data.

Two days before the official government NFP data, market participants usually receive unofficial data from Automatic Data Processing (ADP). ADP is one of the biggest employee management companies in the United States.

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Unemployment Rate

Another number that is watched closely is the unemployment rate. This number measures the percentage of people of working age who are not employed.

A smaller unemployment number is usually better than a bigger one. This is because the economy tends to do well when most people are working.

In this week’s release, the market expects the unemployment rate to increase slightly to 3.6% from the previous month’s 3.5%. Still, these numbers remain at the lowest level in almost 50 years.

A closely-watched unemployment rate is U6. U6 is an unemployment rate that includes also the people of working age who are working part-time for economic reasons. The previous NFP report showed that the NFP was at 6.9%.

A common concept in economics is known as the Philips Curve.

The theory behind it states that the rate of inflation tends to rise in a period of the low unemployment rate. This is because companies tend to increase their wages to attract more talent.

However, this has not been the case in the United States and in other developed countries like Japan and the European Union.

Perform Macroeconomic Analysis as a Trader

Wage Growth

Jobs data are not enough without a review of wages. This is because an economy is not viewed to be successful if there are so many low-paying jobs. Also, the lack of wage growth will not lead to inflation.

Therefore, market participants pay close attention to activities in wage growth. In the most-recent NFP data, wage growth in the US rose by 3.0%, which was slightly better than the previous month’s 2.9%.

On an MoM basis, wages declined from 0.4% to 0.3%.

Another important concept watched by market participants is participation rate. The participation rate is the percentage of people of working age who are working or actively looking for work.

How to Trade NFP Data

A common mistake many traders make is to trade based on the numbers. In this, they will receive a good jobs number and then rush to buy the dollar. In most cases, the dollar moves inversely to the jobs number because the data was already priced-in by the markets.

External useful resources about NonFarm Payrolls

Employment Situation Summary – Bureau of Labor Statistics

Non-Farm Payroll Definition – Investopedia

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