U.S. Non-Farm Payrolls being released Friday at 14:30
Read: What is a Non-Farm Payroll and how does this affect your trading?
Friday is jobs day in the U.S.—with the Non-Farm Payrolls being released at 14:30 in South Africa. The results will set the trading tone for next week and inject some volatility into the currency market.
Economists are looking for job growth of 180,000 on the heels of an unexpected 209,000 increase in July. Average hourly earnings are expected to accelerate +0.2% m/m to an annual pace of 2.6 percent, while the unemployment rate is set to hold steady at 4.3%.
The US Dollar has confirmed some near-term momentum and continued to rally yesterday. If that is due to last for long, is still to be seen. NFP numbers tomorrow will likely play a huge part in the continuation of the most recent greenback strength.
All US economic data this week has been strong so far with ADP NFP presenting a staggering 237k new jobs in the private sector against 185k expected by economists.
What happened last time:
- July non-farm payrolls: 209K vs. 180K expected
- June non-farm payrolls: upgraded from 222K to 231K (+9K)
- May non-farm payrolls: downgraded from 152K to 145K (-7K)
- April non-farm payrolls: downgraded from 211K to 174K (-37K)
- Average hourly earnings growth m/m: 0.3% vs 0.2% previous.
- Jobless rate: 4.4% vs. 4.3% expected, 4.4% previous
- Labour force participation rate: ticked higher from 62.9% vs 62.8% (increasing participation)
The July NFP report printed an upside surprise (209K vs 180K expected) and so the US dollar strengthened as a result. Thus the U.S. economy generated 209K non-farm jobs in July, more than the 180K consensus.
June's job reading was also upgraded from +222k to 231k, however the reading for May was revised lower from +152k to +145k. Thus a net gain of 2k jobs - a positive employment move.
Taking a look at the 'dollar index' below (the U.S. dollar against a basket of major currencies) - we can see the violent reaction to the data on the 30 minute chart. The dollar rallies for several hours following the release of the economic numbers...before consolidating and retracing back to the highs of 93.80.
This move translates to dollar strength against major currencies, and traders would have been looking to back the USD.
Dollar Index Chart (30 min)
Source: Bloomberg
In the lead-up to the July data, we noted that the leading indicators were expecting jobs to meet target due to an increase in jobs growth readings from private jobs data.
To summarise; the NFP report for July painted a strong picture as growth in jobs exceeded expectations, added to this, the previous reading was upgraded. The jobless rate decreased while the labour force participation rate increased.
What can we expect this time?
- Non-farm payrolls: 180K vs. 209K previous
- Jobless rate: steadt at 4.3% expected
- Average hourly earnings m/m: 0.2% expected vs. 0.3% previous
The consensus is that the U.S created 180k non-farm jobs during August – this is an obvious decrease on the 209k created in July. There is concensus that job creation slowed in August - as the market nears closer and closer to full employment.
The latest ADP report, which printed a 237K increase in August, soundly beating the consensus for a 185K rise in private non-farm payrolls. The August reading is even bigger than the previous month’s upwardly revised 201K increase.
The United States appears to be hitting peak employment – it’s going to be harder every month to bring down unemployment because it is already low. There is a chance for an upside surprise, given the strong ADP report.
The basics of what to look for
An upside surprise form 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
