Do you know why the Non-Farm Payrolls is one of the most important macro indicators, if not THE most important? Well, it has always been considered of a major importance, but in the last six years it has become the most expected publication of the month among investors. So, how did this happen?
Shortly after Ben Bernanke became the chairman of the Federal Reserve, the financial crisis broke out and the Central Bank of the biggest economy of the world had to come up with some measures which should fix the “broken circuits”. The FED established two objectives, to improve the labor market by creating jobs (and also reducing the unemployment rate close to 6.5%) and stabilize inflation around 2%. The first one had a bigger consideration. Hence, which was the indicator that shows how many new jobs had been created in every month? Exactly, the Nonfarm Payrolls.
Now, let’s talk about this indicator in more detail. The Nonfarm Payrolls or NFP, how it is usually abbreviated, is the change in the number of the employed people during the previous month, excluding the farming industry and it is released monthly, usually on the first Friday after the month ends. So, this combination of importance and earliness of release contribute to the major impact it has on the markets. Why is this indicator so important and markets really care about it? Because job creation is a crucial leading indicator of consumer spending, which represents the majority of the overall economic activity.
Another aspect you should bear in mind is that with two days before the publication of NFP, a governmental report called ADP is issued, which is kind of a preface of NFP, but they are not always correlated. For an example, last month the ADP came above expectations and two days later the NFP heavily disappointed with a way below expectations figure. Your trading strategies should follow the following fundamental logic and I will take as an example EURUSD as it is the most tradable instrument in the world with a 24.1% of the global trading volume in 2013.
First of all, as in the case of every macro indicator, we have to focus on the forecasted value and the actual value. If the actual value will be reported above the expectations, then the American labor market is improving which means a stronger economy. The effect will be that the US dollar appreciates because investors will buy USD and sell EUR, causing EURUSD to drop. On the other hand, if the actual value is below the expectations, the major objective of the FED is more far away, so the economy isn’t that healthy the markets were expecting and the disappointed investors will sell USD and buy EUR, which means that overall EURUSD will appreciate.
Also, it makes for a big difference in the trading game to not overrate the effect of the NFP report because its publication has to be judged in the economical context of every month. As an example, in both January and February the NFP disappointed investors with a way below expectations figure, but the February one had less impact than the January because the markets kind of expected it. Why? The answer is that these weak numbers were caused by a seasonal external factor, which is the extremely cold weather the United States experienced this winter.
It is important to master this kind of subtleties and apply them in your trading strategies as you will become more profitable in time. I am ending this article telling you to be careful with your trading strategies when the NFP is released next month and beware of the markets mood.