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06 Oct 2020
4 min read

Non-Farm Payrolls: What They Are and Why They Are Important

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Written by OspreyFX News Team
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Non-Farm Payrolls: What They Are and Why They Are Important

Traders Takeaways

  • What are Non-Farm Payrolls (NFP)
  • Why is it Important
  • How to Trade the NFP
  • Updates from the Latest NFP Data

If you have an interest in all-things trading, the term Non-Farm Payrolls (NFP) will not be new to you. It is a term that pops up very regularly in trading articles and news sites. However, it is not a direct trading-related activity. So, what exactly is NFP, why is it so important to trading, and more significantly how can impact traders?

 

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What Is NFP?

Every month the Bureau of Labor Statistics (BLS) conducts an extensive data collection exercise that surveys private and governmental entities in the United States about their payroll. As a result, it is possible to gauge the employment situation in America with figures being reported in the Employment Situation report. It is estimated that this survey covers approximately 80% of the country’s business sectors contributing to the gross domestic product (GDP).

As the term suggests, farming enterprises are excluded from this survey. However, this is not the only sector that does not feature in the survey. While a large portion of government employees are included in the survey, some sectors are excluded. For instance, the survey excludes military personnel, employees of government-appointed officials, employees of the Central Intelligence Agency, Defense Intelligence Agency, National Security Agency, and the National Imagery and Mapping Agency.

Furthermore, the survey doesn’t cover those that are employed in private households, proprietors (such as self-employed individuals), and those employed by non-profit organizations.

Why are NFP Figures Important?

So, why are NFP figures given so much prominence in the media, and why are they so eagerly anticipated?

In a nutshell, NFP figures give a clear snapshot of the labor market situation in the United States. In turn, labor patterns (or how many new jobs are being created) are directly related to economic growth. Therefore, the more people companies hire, the more economic growth is occurring, the more capital is being generated and the better the economy is doing. For instance, it is a known fact that the US Federal Reserve monitors these figures and takes them into consideration when making important decisions related to interest rates. Apart from having a direct impact on policy directions, these figures influence market actions too. In the next section, we’ll delve deeper into the link between the NFP and the markets.

 

How to Trade the NFP

Every first Friday of every month a broad range of stakeholders in the financial market sphere awaits eagerly the NFP figures. The NFP is not an activity that is conducted specifically within the context of the markets but it still carries a lot of weight.

Indeed, the NFP provides important insights into the country’s economic growth, and by analyzing these reports, traders can glean significant details that influence their trades and strategies. A higher NFP is an indication of economic growth but if this occurs at a very fast rate, it can be a sign of inflation. That is why traders do not limit themselves to the headline figures covered by the NFP but also review other vital statistics such as unemployment rates and data on wage growth that are included in the Employment Situation report.

So, what do you need to keep in mind when trading the NFP? This data piece influences forex trading in very specific ways. An increase in the NFP figure indicates a positive economic scenario. This is directly linked to a stronger customer purchasing power and therefore to more money in the economy and foreign exchange activity. Forex traders seek the addition of at least 100,000 jobs in a month as a positive indicator. Conversely, a lower NFP or a somewhat altered figure are likely to lead investors to invest in other foreign currencies.

An important takeaway is to avoid rushing in to take action as soon as the monthly data is made available. As a rule of thumb, it is wise to wait until the information has been assimilated and analyzed. Subsequently, market players will conduct trades in the direction of the prevailing momentum. This provides traders with clearer guidance for their actions.

 

Updates From the Latest NFP

The latest NFP was issued on Friday 2nd October and highlighted the fact that job creation is occurring at a slower pace. Indeed, a total of 661k jobs were created during the month of September which is significantly lower than the estimated 850k. The report also highlighted a decrease in unemployment rates from 8.4% during the preceding month to 7.9% while the Labor Force Participation Rate also dropped to 61.4% from 61.7%.

Paying attention to key data updates such as the monthly NFP ensures that you can continuously hone your trading strategy to reflect the latest events. So, why not keep your eye on our Economic Calendar for key market dates that may affect the assets you trade.

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