USA Non-Farm Payroll Numbers

The period surrounding the release of the non farm payroll figures is undoubtedly the most exciting time of the month for traders and for good reason. Recent research has found that US data releases on nonfarm payrolls, the unemployment rate, initial unemployment claims and consumer sentiment tend to account for the largest moves in both US and British markets. For spread betters, the USA non-farm payroll is perhaps the most important of them all and the minutes and hours after the data are published are now among the busiest trading times for spread betting brokers.   US nonfarm payroll numbers tell us how many people are working (or not working) outside of agriculture. The statistic is produced by the US Bureau of Labor but excludes government employees, private household employees, and non-profit employees that provide assistance to individuals, as well as the farm workers. It’s reckoned that it accounts for about 80% of the workers who produce the gross domestic product (GDP) of the USA.

Christopher Beauchamp a technical analyst at IG comments on USA Non-Farm Payrolls

Nonfarm Payrolls – On a monthly basis, the US Department of Labour issues a report detailing the number of people on the payroll of all companies in the USA, except for farm employees. An increase indicates that employment is up, which is positive for the economy, while a decrease means that employment has shrunk, and is a negative indicator for the economy.

Unemployment Rate – In tandem with Nonfarm Payrolls, the US Department of Labour releases the unemployment rate, which is calculated by dividing the number of unemployed workers by the total civilian labour force. Inversely to Nonfarm, if the unemployment rate is up, this is clearly bad for the US economy and vice-versa.

How can the market be affected? – The nonfarm payroll, released this Friday afternoon at 12:30 BST, is one of the most closely observed economic statistics, since its knock-on effects can be global in scale, influencing indices worldwide. Dollar exchange rates can also feel the impact, as can gold. With the possibility of extreme volatility in the wake of the Nonfarm Payroll announcement, this Friday afternoon may well be an exciting time to trade.

US economic data is regularly released at 1:30 PM GMT and one of these is the US nonfarm payroll employment figure which show the unemployment rate and job growth in the USA. Why is this figure so important? Many of the companies may be listed in London but FTSE 100 companies derive much of their earnings from the United States. This is particularly true for the pharmaceutical, telecom, and banking companies that dominate the index. Therefore it should come as no surprise that the state of the USA economy can move markets in the UK.  And one of the key indicators of the US economy is the non-farm payroll employment figure, which is announced on the first Friday of each month which is why traders commonly refer to it as non-farm Friday.   These labour figures are widely regarded as a key indicator of the strength of the USA economy and have a particularly big impact on foreign exchange markets and dollar pairs.  This is because employment data is often seen as one of the most direct indicators of economic growth which helps investors mull the strength of the USA economic recovery and future Fed economic policy.  In a nutshell, a positive change in the Non-Farm Payrolls figure is an indication of an improving economy, boosting confidence and optimism among the investing and trading community, while a negative or poorer-than-expected figure could be an indicator of deteriorating or stagnating growth, thus resulting in a sell-off. One Friday for instance, the dollar-sterling price fell off a cliff when figures came in at 18,000 – significantly less than the predicted 105,000.  Likewise, when in May 2011 the USA non-farm payroll figures were released and produced dismal figures of 54,000 out of an expected 150,000, the announcement would have netted a sizable profit for a spread trader who had opened a short position on the Dow Jones. Often, the markets have already priced in the expected number, which smooths out any swings; however in some cases the real number can be unexpected and in such cases this can create a big movement in one direction. It’s even possible for the markets to show large swings when the figures are in line with expectations.

“Here we go again – yet another quandary for traders to assess. Undoubtedly, the jobs number will be affected by the everlastingly bad North American weather again (or at least that’s what a low number will be blamed on). However, it is difficult to assess what a good/bad number will do to equity markets. In ‘old fashioned’ times good data is good for equities, but there is so much more to consider at the moment. Interest rate rises, reduction in Quantitative easing, the weather, the economic recovery, not to mention the goings on in the Crimea. Putting all these factors into the melting pot results in a market that is much slower to react. Which, as investors speculate, and then re-speculate as they process information and update their forecasts, creates volatility in abundance.” – William Nicholls, dealer at Capital Spreads

The great thing for traders about the release of the non-farm payroll numbers is that it is virtually guaranteed to produce a tradable move. Non farm Fridays creates volatility which for most traders means opportunities. Some providers even allow you to place a spread bet directly on the non-farms numbers giving you the  opportunity to take a position on this important announcement.   It not only moves the stock markets, but its effects can be seen on the Forex market on all major currency pairs, and particularly on the GBP/USD as this is heavily impacted by non-farm figures that deviate from expectations.  In fact, this news is traded more on the currency markets than on the stocks and shares markets.  According to an IG Index market analyst, the period immediately following this announcement is commonly the busiest dealing period of the month with more than 7,000 spread-bets and CFD transactions carried out in one single minute between 1.30pm to 1.31pm compared to just 50 in an average minute. Trading volumes are directly proportional to how the payroll figure turn out to be in relation to consensus forecasts. Thus, the bigger the difference from the predicted analyst figures, the bigger the increase in trading volumes following the time frame after the data is released. Whether you can make money on it is not guaranteed, however, as this requires that you trade in the right direction which can be tricky as the volatility immediately following the announcement could mean that a market may switch from positive territory to negative, or vice versa, quite quickly. One strategy is to wait on the sidelines for, say, 15 minutes to wait while the initial swings happen, and determine the prevailing momentum. Depending on your trading style, you should look for a signal that the market has decided what direction to take and then decide on whether to go long or short.

“I always find the reaction post the NFP numbers to be bordering on insane. Far too much testosterone pumped fear and greed and not enough level headed thought.”

This requires a day trading strategy to take full advantage of the swing. So again it is best to totally ignore the first 15 minutes after the news is released, as jumping blindly immediately after the figures have been released can turn out to be a very costly exercise. Sometimes it may take up to an hour of trading before the direction is clear. You should look for an inside bar, perhaps on a 15 minute chart, and when a subsequent bar closes above or below the inside bar, that is an indication of the market direction, and signals a trade can be attempted. You need to be disciplined in stopping out your trade if the signal proves to be a fake, and the effect of the news release will be over by the following Monday, making this a very short term strategy. If you choose to hang on to your position after Monday, then that would be for reasons other than trading the nonfarm payroll numbers. Also, if you decide to deal immediately following the employment figures news release, then risk management is even more important and guaranteed stops can come in useful here – although you really don’t want to set your stop too tight as such news announcements can produce wild up and down price swings.

We can take as an example an extract from Shares Magazine; the impact on the FTSE 100 was clear from the release of the February figure on 10th March. In February, nonfarm payroll employment grew by 243,000 which, according to reports, was above market expectations. The FTSE 100 was weak on the day but put on 60 points between 1:30 PM and 4:30 PM. The effect is less pronounced for the FTSE 250 and the FTSE small cap indices, where constituents are much more skewed to the UK economy.

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