The Importance of NFP Report Results
NFP stands for Non-Farm Payrolls, which is the jobs data in the United States everyone in the world is watching. As explained in the earlier article here on the Forex Trading Academy, the main central bank in the world, and the most important one, has jobs data in its mandate as well. This is the Federal Reserve of the United States (Fed), and the dual mandate refers to inflation data and jobs (employment) data. Basically, these are the two things the Fed considers before moving on rates. While the inflation mandate is strictly defined (the aim is to keep inflation below or close to 2%), when it comes to the jobs data, things are a bit more complicated. Not only are the actual job numbers important, but the unemployment rate as well.
Throughout the trading month, there are several releases that make possible to predict the value of the NFP. This means that traders can position for the next Fed meeting, based on the NFP outcome.
How to Interpret NFP
The NFP data is released every first Friday of the month, at 08:30 EST in the United States. This makes the whole NFP week, most of the time, a ranging week, as no one is taking a chance before such an important number is released. Together with the actual jobs that are created, the unemployment rate is released as well. As a rule of thumb, the more jobs are created in an economy, the better it is, and the central bank leans towards hiking the rates. The same is true for the unemployment rate: The lower the unemployment rate, the bigger the chances are that the central bank will hike the rates. This is viewed as positive for the currency in the sense that an economy that is expanding will be met with higher rates from the central bank. Higher rates will attract buyers for the currency, and all currency pairs that have that currency in their componence will move aggressively. Traders use the following piece of information to form an educated guess regarding the NFP data to be released, and the implications on the future interest rate levels.
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Initial and Continuing Claims
The initial and continuing jobless claims data are released on a weekly basis, on Thursdays, right at the start of the North American trading session. While considered to be a lagging indicator, it shows how the jobs market in the United States is doing, and offers a solid indication about the future NFP release. Because it is released on a weekly basis, it refers to the previous week. This is the reason why it is lagging, but make no mistake that the lagging is only on a 1-week timeframe. Therefore, if a rising or falling trend in the jobs market is about to form, there is still plenty of time for market participants to know that before the NFP is released. This will help position for the interest rate decision, and traders will be able to make educated guesses to adjust their trading accounts accordingly.
The Initial Jobless Claims indicator shows the number of people applying for unemployment benefits for the first time. The higher the number, the worse for the currency, and vice versa. Continuing Claims, on the other hand, shows the number of people that didn’t find work after enrolling for unemployment benefits, and this is far more important than the Initial Claims indicator. This is because it shows the inability of the US economy to create enough jobs to satisfy the demand. In turn, such a thing will cost the government more money, the deficit will be on the rise, and a vicious economic circle will start from this moment on. Hence, the lower the Continuing Claims data figure, the better for the economy and the more bullish for the currency. Anticipating the changes in both these indicators is something that Forex traders strive to do. These are important pieces of economic data that show perfectly why fundamental analysis is so important, and why traders need to constantly watch all these details. Let’s not forget what traders are using this information for: to predict the future NFP number. The aim is to know beforehand whether the NFP is going to beat the expectations or not, and in positioning for that event, traders are basically using fundamental analysis in their trading decisions.
Other Job-Related Indicators
Because the FED is looking at the jobs data as part of its mandate to move on interest rates, all indicators that show pieces of the overall jobs market are of vital importance. Such indicators are the ADP (private payrolls) and the ISM Non-Manufacturing. The ADP number is released in the same week as the NFP, except that it comes out on a Wednesday and not a Friday. It is important because it shows the health of the private sectors. Some say that the ADP is more important than the NFP, as the health of the private sector is crucial to the overall US economy. While this may be true, the Forex market, and markets in general, still regard the NFP as being the decisive one when it comes to the decisions the FED will take in the future. Other people use the ADP to predict the value of the NFP. In a way, this makes sense since the ADP is released 2 days before the NFP. So why not using that piece of information? The answer is because there is no direct correlation between the two releases, as many times the ADP and the NFP may show very different things. The market will always put more emphasis on the NFP data.
Besides the ADP data, the ISM Non-Manufacturing indicator has an employment component in its formation. This indicator is a survey, but still shows relevant data for the jobs market. The ISM Non-Manufacturing is usually (though not always) released a few days before the NFP, and traders and trading algorithms are fervent in looking for details regarding how this piece of data may influence the NFP release. Sometimes there is a strong correlation between the two, but not always. All in all, the conclusion is that the FED considers the jobs market before moving on rates, and traders know that. This makes all the jobs-related info the subject of intense scrutiny, and it should be closely watched by any serious Forex trader.
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Recommended further readings
- How global labour arbitrage will shape the world economy. Roach, S. (2004). Global Agenda.
- Macroeconomic news and exchange rates. Pearce, D.K. and Solakoglu, M.N., 2007. Journal of International Financial Markets, Institutions and Money, 17(4), pp.307-325.