Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

Why Non-Farm Payrolls Influence the Dollar and Stock Markets so Much

We take a closer look at one of the most important economic announcements each month

With the next Non-Farm Payrolls (NFP) announcement from the U.S. coming up tomorrow (5.12.14), we decided to break down the reasons why this particular bit of data attracts so much attention from traders.

The dry, technical definition for these payrolls is the change in number of employed during the last month, excluding those in the farming industry (for reasons probably linked to the picture above). It’s released monthly always on the first Friday after the month has ended.

The report itself contains hints about the condition of the U.S. economy, with the exception of said farming sector, which generally has a small portion of the labour force employed, but skews the overall data due to seasonality. The sample for the payrolls is huge and gives a good picture of the overall situation in “real-time” – when it comes to such big amounts of human generated data getting it a week later is as close as it gets.

Before the release of the data we have a forecast which has guided market participants to this point on what has happened in the labour market. After the number comes out of the hat, if it’s better than the forecast, that means that more people were hired by companies. By proxy, this means that businesses have confirmed projects and plans and need to fill working places. In this sense it’s considered as a reliable indicator of business climate in real time, because it’s based on measurable data from contracts between employees and employers.

The second level of interpretation is that the confirmation of more existing jobs also means more confirmed spending, as people will get salaries and use it in different ways, fueling different industries. There are also many other ways to read the data, but these are the main two.

So how should you interpret the numbers that come out. The usual reaction of the markets is that if the announced number is higher than the forecasted one, then that is something good for the U.S. dollar and it gains ground against other major currencies. This happens due to the fact that literally more dollars will be spent in the real economy and there will be demand for them.

Stock markets and the companies that comprise their indexes are also to gain from more people employed, because of the knock-on effect we mentioned from people with salaries who spend them in different sectors.

If the numbers are weaker than the forecast, then we can see the opposite effect – weakening of the dollar and a slump in stock prices.

Another important point to have in mind is that the NFP number comes out with the trade balance and the unemployment rate (as is the case tomorrow). While the trade balance is released for the month before (so the data is 35 days old), the unemployment rate is also based on information about the previous month and shows how many people are officially out of a job and have to rely on the welfare system, gathered from those who are employed.

When the data comes out from the Bureau of Labor Statistics the first thing market participants do is to quickly compare it to the forecast number. This is preferred to only comparing it to data from the previous month, as the forecast is what has been guiding the markets in the last several weeks and is based on different indications.

Quite often we see volatility in the stock market and occasionally in the forex one. For day-traders this is a good opportunity for entries in new trends that move sharper across the charts and provide more percentages or pips to trade on. However longer-term traders prefer to take into account only the hard data and prefer to steer clear of the exact moments following the announcements, instead waiting for things to calm down and then enter their positions.

Most affected from the announcement are the major U.S. indexes such as the Dow Jones, the S&P 500 and the NASDAQ, as well dollar related currency pairs. But the numbers do frequently influence the opening of the Asian and European trading sessions on the next day, as U.S. consumers are still regarded as the largest and most potent economic force in the world.

The latest Non-Farm Payroll data will be released tomorrow at 1:30pm GMT and you can follow any changes in the markets through your account in Trading 212 PRO.

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