Thursday, December 2, 2021

Non-Farm Payroll (NFP) Q&A

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Ruey L.
Full time trader, part time poker player.

What is NFP?

Non-farm Payroll (NFP) is one of the most important economic releases in the financial markets.

When is it released?

It is usually released at 8:30 Eastern Time, every first Friday of the month.

Why is there a need for NFP reports?
NFP measures the amount of jobs added or reduced in the previous month. However, the numbers do not include farm workers, government employees, non-profit organisations’ employees and private household employees.

Why is NFP so important?
Due to its size and the interconnectedness, the U.S. economy has a tremendous impact on global economies. The changes in the number of jobs depicts the health of the U.S. economy and the strength of U.S.Dollars and hence affecting other economies as well.

What does the NFP numbers imply? 

A positive number means there were more jobs added to the markets in the last month and it is a sign of economic growth. There are more people with jobs, more disposable income available to spend and thus consumption increases. The opposite can be said for negative or lower numbers than the consensus expectation.

Impact

We can almost always observe a huge spike in the volatility of prices of securities in either direction once the report is released. Which securities, you ask? Well, a lot.

The U.S.Dollar is the global reserve currency and a lot of currencies are pegged to the USD. Moreover, commodities such as oil and gold are priced in USD. Equities, currencies, commodities, interest rates and treasuries are all impacted by the NFP numbers as they are interconnected in some way or the other.

Figure 1: GBPUSD 15-minutes chart. 04 June 2021.

Here is a quick breakdown of the June 2021 NFP Release.

The numbers came out 46k lower than forecasted and it is not good for the U.S. economy as the growth did not meet expectations. This means USD will weaken relative to other currencies and the effect can be seen in the figure above. 

GBPUSD shot up as the report was released. The pound sterling has strengthened against the dollar and one of the reasons might just be the not-so-good numbers of NFP.

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