What Are Non-Farm Payrolls (NFP)?

What Are Non-Farm Payrolls (NFP)?

Non-farm payrolls, also referred to as NFPs, represent the change in the total number of paid US workers of any business - excluding the agricultural industry and general government employees. They are published in the US on a monthly basis by the US Bureau of Labour Statistics, and are one of the most important macroeconomic reports that come from the world’s largest economy.

NFPs represent the change of employment in the non-farming sector in the US economy. NFPs typically encourage high market volatility on certain instruments, as investors seek to take advantage of the rapid price movements and react to the data release.

When are NFP data typically released?

NFP data is normally released by the United States Department of Labor on a monthly basis as part of a comprehensive report on the state of the US employment market. The NFP data is normally scheduled for release on the first Friday of every month at 1.30pm GMT (sometimes it might differ when the UK switches to daylight savings time earlier or later than the US)..

How to Interpret the NFP Data

Depending on the NFP data, financial markets have a habit of reacting quickly and severely, which is why it’s always important for traders to understand the potential market reaction to the data before it’s released.

Better-than-expected growth in NFPs indicates that the US labour market is strengthening, improving the prospects for the US economy. This then often has a positive effect on the US dollar and US stocks. On the other hand, weaker-than-expected growth in NFPs or even a bad loss of jobs can have the opposite effect, dampening US economy prospects, and see a weakening in the US dollar and US stocks. It can also trigger a rise in the price of Gold, should investors seek the precious metal as a safe haven.

While the number of jobs added per month is the ‘headline’ figure that garners the most attention, the non-farm payroll data is also typically accompanied with other important information, such as:

• What the unemployment rate is as a percentage of the overall workforce
• The increase or decrease in jobs across the various employment sectors
• Average hourly earnings
• Private sector jobs growth
• Revisions of previous non-farm payrolls

All these factors combined make the markets highly sensitive to any NFP data released, particularly when the release is vastly different to market consensus. Generally, there is high volatility around any NFP release and traders should normally be wary if they have any open positions on any instruments that could be affected, such as US indices, or major currency pairs involving the dollar and Gold.

Impact of NFP (jobs data) on Inflation and FOMC Interest Rate decisions

As the global economy emerged from the Covid pandemic and started to suffer from higher than expected inflation, the markets focus on NFPs gained even more importance than usual in providing clues as to the potential path of US interest rate movements. As the Federal Reserve battles to cool inflation as part of its ambition to achieve sustainable economic growth, one tactic it has employed to do so is by raising interest rates. Yet rising interest rates also has the risk of suppressing economic growth too hard and too fast, so the Fed has had to strike a delicate balance between cooling inflation without triggering a sharp decline in economic growth. The release of Non-Farm Payroll data each month gives investors some important economic data points in analysing whether the US Federal Reserve (via its Federal Open Market Committee or FOMC) could change its interest rate path. For example, if NFPs would come in stronger than expected, this might be interpreted by investors that the FOMC could feel the US economy is strong enough to absorb further interest rate hikes. This is why NFP day (as sometimes termed by investors) garners so much attention in the market.

Example of the Markets Reacting to NFP

In the example above, we can see how EURUSD reacted to the NFPs in June 2016. The market anticipated a number of 159,000 new jobs created in the non-farming sector in the US economy, while the actual reading brought a negative surprise of a mere 38,000. The worse than expected reading caused the weakening of the US dollar against the euro with the EURUSD market gaining 154 pips in value in a matter of just 30 minutes.

Please remember that even though the markets have reacted to NFP results in a particular way historically, this does not guarantee they will react in the same way in the future. Also, please be aware that the markets can be influenced by a wide variety of factors, with the NFP result being just one such factor.