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Eight reasons why traders care about US nonfarm payrolls

On the first Friday of each month the US Bureau of Labor Statistics releases employment data, including nonfarm payrolls (NFP). As the world’s #1 economy, what happens in the US labour market is carefully monitored by analysts, economists, day traders, investors and market participants across the spectrum. In fact, the NFP is the single most important economic data release of the month.

But why? Firstly, NFP is the clearest empirical measure of the number of jobs added or lost in the US economy over the previous month. By excluding employment activity in the agricultural sector, the figure removes any seasonal distortions to aid month-by-month comparisons. So what does a rising or falling NFP figure show traders?

1. Increasing NFP indicates a growing economy

If the NFP figure increases from one month to the next, it is the clearest possible indication that more people are being hired and the amount of income and expenditure is increasing in the economy, all of which bodes well for the health of the US economy.

2. The world economy looks to the US

Gone are the days where what happened in one part of the world had little or no impact elsewhere. Today we live in a highly competitive, integrated, interdependent and synergistic global marketplace. When the US economy is thriving, this bodes well for dollar-denominated assets, investments and interests. Likewise a downturn in NFP leads to a loss of confidence, especially in highly volatile emerging market economies.

3. Rising NFP indicates more personal disposable income

As the number of employed people increases so too does their buying power, which is contributed back into the economy. With increasing personal disposable income, expenditure on retail, housing, automobile and other sectors increases too. The domino effect of positive NFP data is unmistakable.

4. NFP reports trigger fluctuations in underlying assets

Currency traders, commodity traders, equities traders and indices traders stand to benefit immeasurably from reading market conditions correctly and acting accordingly. If the actual NFP figure exceeds or falls short of the consensus estimate, you can rest assured that money is waiting to be made in the underlying assets listed above.

5. You can drill down to see how specific sectors are performing

Even though NFP is provided as a single figure, it is the agglomeration of multiple figures. Approximately 140,000 businesses as well as government agencies are polled to provide NFP data. The total number of individual work sites represented is 486,000. For example, NFP represents gains/losses in support services, computer systems design, architectural/engineering services, health care, retail, food services, drinking places, construction, mining, manufacturing, wholesale, warehousing, government, the financial sector and more. All these units are added together to produce the total NFP figure.

6. NFP can provide a visual representation of performance over time

When traders look at the NFP chart over the course of a year, it is abundantly clear how much growth did or didn’t take place in the US economy from one month to the next. Recall that each figure represents growth or contraction against the previous month’s figure. In 2015, NFP has consistently grown from month to month.

7. NFP is important because USD is the world’s reserve currency

Anything that impacts on the strength of the US dollar is important for the global economy and automatically deemed significant by a global community of traders. Since the vast majority of commodities are dollar-denominated, what happens to the dollar is especially important for commodity traders too.

8. Markets are typically volatile around NFP releases

Whichever way you look at NFP, it’s a market-moving indicator, both in anticipation and response. The consensus estimate may or may not match the actual figure, and if there is no match speculators have a field day. This can work for you or against you. Scalpers will extract as much profitability from the short-term market fluctuations as possible.

This month’s NFP reading

In October nonfarm payrolls increased by 271,000 jobs, against a consensus forecast of 180,000. This was the largest jump all year, and clearly surprised everyone. The consensus forecast for November’s figure is an increase of 200,000 jobs. Estimates tend to be factored in to the markets so, while an actual reading short of this forecast could still represent another healthy rise, it might paradoxically trigger a loss of confidence.

Look out for the NFP release this Friday at 8.30am Eastern Standard Time, 1.30pm UK time.

Brett Chatz

Published: 1 December 2015

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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