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Nonfarm payroll report: when it’s released, what it shows and how to trade it

By Connor Freitas

With the coronavirus pandemic bringing the world to a standstill, America’s nonfarm payroll report has never been more important. Find out more about it here.

Nonfarm payroll report: when it is released, what it shows, and how to trade it

The NFP report is an important barometer for the US economy at the best of times – and right now, it’s offering a powerful insight into the impact that the coronavirus pandemic is having on America’s workforce.

What does NFP stand for? That’ll be nonfarm payroll. This report is published monthly by the US Bureau for Labour Statistics, and it offers an in-depth look at how employment figures are looking nationwide.

Here, we’re going to go through the latest nonfarm payroll news, explain how a nonfarm payroll trading strategy can help you navigate the markets during these uncertain times, and look at the types of statistics you’ll be able to find in an NFP report.

What is the nonfarm payroll report?

The nonfarm payroll report aims to offer a snapshot of the American workforce. It runs to dozens of pages and contains a wealth of data that breaks employment rates down by sector, gender, race, age, location, length of service, earnings and hours worked per week. The NFP report allows economists and traders to spot underlying trends in the market – key themes such as the industries that are contracting and expanding, and how things have developed since last month or last year.

Nonfarm payroll report: when it is released, what it shows, and how to trade it

As the name suggests, nonfarm payroll data doesn’t cover everything. Agricultural workers are not accounted for in these monthly reports, nor are people who work for not-for-profit organisations such as charities. Although the vast majority of government employees do fall under the nonfarm payroll figures, those working for the Army, the National Security Agency and the Central Intelligence Agency do not appear. In some ways, you could argue that this adds up – some of this data could be sensitive.

Another big caveat to remember when it comes to the nonfarm payroll report is that it won’t exhaustively cover roughly 16 million Americans who are self-employed. Only those who have formally registered their business are included in the stats.

Nonetheless, it’s still a pretty comprehensive report. Estimates suggest that it covers about 80 per cent of the US population.

So… when is the nonfarm payroll report released? Well, the US Bureau of Labour Statistics has created a fixed timetable with a view to delivering some certainty for investors. The data usually drops on the first Friday of every month.

To ensure that it doesn’t spook the New York Stock Exchange or the 0'>Nasdaq while trading hours are underway, nonfarm payroll statistics are issued at 8.30am local time, roughly half an hour before the opening bell. This is in keeping with the reporting practices of listed firms, who will normally issue their earnings reports once markets close for the day.

The benefit of this approach to nonfarm payroll reporting is that we know exactly when reports are published. Every release covers the preceding month. As such, we’ll get May’s figures on June 5, June’s figures on July 2, July’s figures on August 7, and so on.

Nonfarm payroll dates

While we’re here, let’s take a sneak peek of the headline figure from the nonfarm payroll report over recent months.

Nonfarm payroll report: when it is released, what it shows, and how to trade it

As you can see here, figures were relatively steady from October 2019 to January 2020. You often notice a dip in the unemployment rates stipulated by the nonfarm payroll report at this time of year thanks to the effect of seasonal work. Retail normally surges its ranks in the run-up to Christmas – after all, there isn’t much demand for Father Christmas in the summer.

You can begin to notice a turning point in the nonfarm payroll figures for March (remember: these reports are released the following month). This was when the US stock market had begun to pay much more attention to the coronavirus, after initially shrugging off its spread in China and Europe. The report showed early signs of the jobless claims that were to come.

The loss of 701,000 payrolls was the severest since the 2008 financial crisis, and it was the first time that nonfarm payroll growth was in negative territory for nine-and-a-half years. The US Bureau of Labour Statistics report wasted no time in attributing this to Covid-19, writing: “It is clear that the decrease in employment and hours and the increase in unemployment can be ascribed to effects of the illness and efforts to contain the virus […] In March 2020, there was an extremely large increase in the number of persons classified as unemployed on temporary layoff.”

Understandably, there’s now a lot of nervousness surrounding April’s nonfarm payroll report, which is going to emerge on 8 May.

Nonfarm payroll impact on forex, stocks and commodities

The impact of nonfarm payroll reports can be compared to the butterfly effect – the analogy where a butterfly flapping its wings can cause a typhoon. Essentially, the point that’s being made is that these figures can have large and surprising consequences.

You wouldn’t necessarily think that this data would impact foreign exchange markets all that much, but it does. Strong growth in employment means that investors from around the world are increasingly likely to throw their cash behind US ventures, in turn strengthening the dollar. On the flipside, weakening economic growth – or performance that simply doesn’t meet the expectations of analysts – has the potential to cause sell-offs as investors seek to store their capital elsewhere.

Over on the stock markets, you may notice that the nonfarm payroll report has an outsized effect on individual companies. For example, a net loss in employment figures could have a hit on businesses that provide consumer discretionary items – products that are non-essential but desirable. If large swathes of the population are being let off, it’s highly likely that they’ll have less disposable income to spend on such luxuries.

That brings us neatly to commodities. NFP trading patterns typically show that the likes of gold perform strongly whenever figures from the payroll report are worse than expected. This is because precious metals are often seen as a safe haven during times of turbulence.

NFP trading: top tips

Are you on the lookout for a nonfarm payroll forex trading strategy? If so, here are a few hard-and-fast rules about what’s good – and bad – for the US dollar.

Dire figures normally prompt forex traders to opt for currencies with a higher yield than the US dollar – not least because it illustrates that the economy isn’t growing or is in decline. What’s unusual about the current situation is that practically every country is in the same boat. Although America’s nonfarm payroll figures are going to make for uncomfortable reading in the coming months, other developed economies are witnessing the same thing.

As forex markets don’t close, it can be tempting to make moves as soon as the figures come out. However, this can work against you. Once the overall tone and sentiment of the report have been established, you’ll normally find that trading pairs such as USD/EUR follow an upwards or a downwards trajectory, and it can be easier to capitalise on this momentum. Of course, there’s little guarantee that any strategy will work.

NFP trading: reading the data

When NFP trading, taking the time to digest the data and avoid knee-jerk reactions can ultimately prove more profitable in the long run.

Remember that the numbers can be revised, and it can be a good idea to look at how trends are evolving over a period of several months. Keep an eye on how unemployment and average wages are developing in the medium term, as this will offer a precious insight into whether the US economy is gaining strength or starting to decline.

Nonfarm payroll report: when it is released, what it shows, and how to trade it

Separate to the nonfarm payroll report, weekly unemployment claims issued by the US Department of Labour can provide a helpful indicator of what’s to come. In the chart above, you can see how unemployment claims ballooned in late March and early April – more than 22 million jobless in the space of four weeks. These figures will undoubtedly filter their way into the NFP on May 8.

It’s unlikely that the nonfarm payroll report will weigh heavily on the markets for days on end, and this means that capitalising on the statistics often falls to those who are making short-term trades. Technical analysis is your friend here – and it’s worth remembering that erratic market moves can work in your favour.

FURTHER READING: Stock market crash 2020: what is going to happen next?

FURTHER READING: Which investments are the best during a recession?

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