Non-Farm Payrolls (NFP) measures the number of jobs gained in the U.S. during the previous month that aren’t farm-related. It is typically released on the first Friday of the new month, and also includes the Unemployment Rate, Average Hourly Earnings, and the Participation Rate. While all of these data can have an impact, NFP is the main driver of market movement and is often times the single most-watched economic event that is released on a monthly basis.
Not all economic news events are created equal. Some events create a lot of hysteria and knee-jerk reactions, whereas others go unnoticed. The ubiquitous Non-Farm Payroll (NFP) report out of the U.S. is an example of the former.
So much attention is paid to the NFP report that pundits from across the financial blogosphere attempt to predict its eventuality and impact across a variety of financial instruments.
The large reaction is due in part to the Dual Mandate of the Federal Open Market Committee of maximum employment and stable prices. The “maximum employment” part of that mandate means that the Fed looks at NFP to help determine what interest rates will be in the future which has an outsized impact on the health of the economy. If job growth is strong, the Fed would typically look to raise interest rates assuming inflation is in check, and vice versa if job growth is weak. However, simply determining if NFP is weak or strong is another matter altogether due to expectations.
The consensus expectation for NFP plays a large role in how the markets react to the data, with the median expectation of a group of professional analysts serving as the decision point. For example, if the consensus expectation is 200k and the number comes out at 205l, the market reaction will not be too great as the actual situation and the market expectation are very close. In other words, the greater the discrepancy between consensus expectations and actual data, the stronger the market reaction.
Two Ways to Trade NFP