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.
• It’s a monthly report generated and reported by the US Bureau of Labour Statistics, and is typically released on the first Friday of the month, for the previous month’s data.
• It’s seen as an important statistic in gauging the strength of the US economy, which is the largest in the world.
• 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.

The non-farm payrolls (NFPs) 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. They are most frequently published on the first Friday of the month at 1:30pm UK local time, and represent the change of employment in the non-farming sector in the US economy.

The NFPs are a significant report that helps investors to gauge the strength of the US economy and as a result, this data release can bear a strong influence on currency markets, indices and stocks around the world.

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.

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.

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.