How to Trade Nonfarm Payroll

The monthly US jobs report released by the Bureau of Labor Statistics. The Employment Situation Report notes how many workers were added to the economy in the month, as well as providing other labour market gauges like the unemployment rate, and average hourly earnings. Traders are usually focused on the 'headline' nonfarm payrolls (or "NFP"), which tells us the number of paid workers that were added in the month, excluding farm and government workers.

The data is usually released on the first Friday of the month at 08:30 Eastern Time. The data will be published to the Newsquawk news feed as well as announced over the audio squawk. Traders tend to focus on the headline nonfarm payrolls number, the unemployment rate, and the average hourly earnings numbers. We then take a closer look at the other metrics, which include a breakdown of the types of jobs, and measures of labour market slack, like how labour participation has changed in the month.

Over the course of the month, there are many data releases that give us clues about how labour market conditions are faring. Weekly initial jobless claims and continuing claims data, the employment sub-indices within business surveys like the ISM and S&P Global PMIs are all very useful. The ADP Research Institute also releases a monthly national employment report, usually published a couple of days before the official jobs data, which helps traders shape expectations.

The main difference between the official jobs data and the ADP's report is that the former is based on statistics from two monthly surveys: the household survey (which measures labour force status, including unemployment, by demographic characteristics) and the establishment survey (which measures nonfarm employment, hours, and earnings by industry); the latter is based on actual transactional payroll data as well as past official BLS reports.

From an academic perspective, if the jobs data was positive (which may mean nonfarm payrolls above expectations, unemployment rate falling, the participation rate increasing, wages rising), you could see the following impacts:

Equities: Growth assets like stocks should benefit

Fixed Income: Defensive assets like bonds underperform

Forex: USD rally

Energy: Probably higher on the upbeat data, but depends on extent of Dollar reaction/strength

Metals: Industrial metals prices firm up

Conversely, a negative announcement relative to expectations could be a sign of a weakening economy that would require policy support. You could see the following impacts:

Equities: Stocks come under pressure

Fixed Income: Defensive assets like bonds rally

Forex: USD value drops

Energy: Probably lower on the downbeat data, but depends on extent of Dollar reaction/strength

Metals: Industrial metals prices drop

In recent years, particularly after the Great Financial Crisis, the labour market data has been a key part of forming monetary policy expectations, since the Federal Reserve's mandate is to achieve maximum employment in the context of stable prices. Because of that, there has sometimes been a dynamic where a strong jobs report could be a negative for risk assets as traders reason that it might hasten the Fed's withdrawal of supportive policy. In our monthly previews, we detail what the focus of the market is, which will help traders understand how asset prices might react in the positive and negative scenarios.

REMEMBER: This is not trading advice. This is educational material written from an academic perspective and the markets respond to a myriad of factors each time. The market can react differently.