US Non-Farm Payroll Release

Friday is jobs day in the U.S.—with the January Non-Farm Payrolls being released on the 2nd of Feb at 15:30 in South Africa.

In my last post earlier this week I discussed why the NFP was important, if you missed it you can find it here. Ultimately the result of the NFP sets the trading tone on the USD for the week ahead, and it injects some volatility into the market - giving traders an opportunity to profit.  

This is what you can expect for the January NFP coming up...

What happened last time:

• December NFP: +148K jobs vs +190K expected (under perform)
• November NFP: upgraded from +228K to +252K 
• October NFP: downgraded from +244K to +211K 
• September NFP: upgraded from -33K to +18K 
• Average hourly earnings December: 0.3% as expected
• November average hourly earnings: downgraded from 0.2% to 0.1% 
• Jobless rate: Steady at 4.1%
• Labor force participation rate: flat at 62,7% 

The U.S. economy only generated 148K non-farm jobs in December, missing expectations for a 190K increase.  

• wage growth was as the marekt expected, higher than November. 
• labour force particiaption stayed flat at 62.7%

Looking at the chart below, we can see what happened in January when the last NFP was released. The NFP results  missed expectations, resulting in a knee-jerk reaction in flash fall of the U.S. dollar, giving traders an opportunity to make a profit by shorting dollar based currency pairs.  

 Dollar Index Chart (15 min)

Source: Bloomberg

The lower than expected NFP reading resulted in the dollar weakening.  Take a look at this next chart on the Yen, the NFP manages to disappoint the market enough to reverse a surging dollar.  This is a key indication of the importance that this data presents to the market, up until the 5th of January the dollar had been rallying against the Yen, until the NFP struck, reversing the gains. 

The weaker NFP thus presented a great opportunity to either exit a long position on the USD, or enter a short sell position and benefit from the dollars weakness by betting on the price going down. 

What can we expect this time?

• NFP: +180K vs 148K previous
• Jobless rate: steady at 4.1% expected
• Average hourly earnings m/m: 0.2% expected vs. 0.3% previous

The Bloomberg survey of anaylsts suggest that there is an expected employment growth of 180K in January. 

Although 180,000 new jobs per month would not have been considered strong last year, the labour market in the US has tightened significantly since. Therefore, we expect a tightening labour market - and would expect average hourly earnings to increase as skills supply tightens. 

The key figure to watch is going to be the change in average hourly earnings, if this number disappoints, it signals weak wage inflation in the US. 

Forecasted NFP numbers:

• available leading indicators hint at a strong start to the year, therefore I expect the reading to match market expectations. 
• ADP reported that 234,000 private sector jobs were added in January, marking strong start ot the year
• better-than-expected reading for NFP triggers a quick Greenback rally as a knee-jerk reaction, a postive reading may be the time to cover in short positions against the dollar. 

The basics of what to look for

An upside surprise from NFP may cause the U.S. dollar to rally. Alternatively, the dollar might slip on weaker NFP results.

A NFP that exceeds expectations, combined with higher hourly earnings would give the US Federal Reserve a good reason to increase interest rates more aggressively for inflation targeting purposes.

The expectations of higher interest rates could see the greenback firm against other major currencies – keep an eye on USD/JPY, EUR/USD and GBP/USD.

The S&P 500 has broken record highs, an increase in interest rates is a bad sign for equity investments – why would you want to hold riskier equity when you can get a decent return on a risk-free fixed income investment? A strong NFP result may then trigger a consolidation in the S&P 500 further.

What is the Non-Farm Payroll? 

The NFP report is treated as a key economic indicator for the United States.  The NFP is considered the most comprehensive employment number released – as it represents 80% of the U.S workforce. 

NonFarm Payrolls are reported on the first Friday of the month, whereby the number of additional jobs added from the previous month is released.  The report contains valuable insights into the labour force that have a direct impact on the stock market, the value of the U.S. dollar and the price of gold. 

The reason why farmers are excluded from employment figures is due to the seasonality in farm jobs.  

The Strategy:

There are multiple ways of trading the NFP report; there are 3 basic strategies to be aware of:

• Traders who take a position early, before the data is announced, in anticipation for the directional movement the event will cause.
• Traders who take a position as the data is announced, hoping to scalp a quick profit off the volatility created by the data, be it negative or positive.
• Traders may wait for the market to digest the significance of the results, and after the initial swings have occurred, take a position on the side of the dominant momentum. 

Trading Products Affected:

The NFP report affects major currency pairs as well as U.S. market index futures.  Traders should take note of:

• GBPUSD
• JPYUSD
• EURUSD
• MEXICAN PESO 
• S&P500 Index
• Wall Street Index
• Gold
• VIX

When and what time is the US NFP (Non-Farm Payroll) announced in South Africa?

2nd February 2018 at 3.30pm

May your trading day be profitable!

Read previous NFP note for December...