Read: What is a Non-Farm Payroll and how does this affect your trading?
It 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.
Economists are looking for job growth of 182,000 in May on the heels of a 211,000 increase in April. Average hourly earnings are expected to accelerate a tick to an annual pace of 2.6 percent, while the unemployment rate holds steady at 4.4 percent.
The ADP’s private employment report released Thursday slowed expectations, raising the bar for Friday’s release somewhat and fostering a rise in Treasury yields as well as the U.S. dollar. A strong result may also dampen US Equity markets; see S&P500 and Wall Street
The April NFP report printed an upside surprise and so the US dollar weakened as a result…. Wait why would the U.S dollar weaken on stronger data?
In the lead-up to April, we noted that the leading indicators were mixed but generally pointing to a slowdown in jobs growth due to weaker data in the service sector.
Unfortunately, the data for March was amended downward by 19k jobs to a poor +79k reading, thus jobs increased by 19k less than originally estimated. Therefore, markets needed extraordinary results to make up for the previous shortcomings.
To summarise; the NFP report for April painted a mixed picture as growth in jobs exceeded expectations but the previous reading got downgraded. The jobless rate improved due to a lower participation rate, while previous wage growth readings were revised lower.
The consensus is that the U.S created between 180k to 186k non-farm jobs during May – this is an obvious reduction than the 211k created in April. The lower job generation would be expected, as the United States appears to be hitting peak unemployment – it’s going to be harder every month to bring down unemployment because it is already low.
An upside surprise form NFP may cause the U.S. dollar to have a brief spike higher. 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 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 is near 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 lower the S&P 500.
Currently the USD is trading around ¥ 111.52
A strong NFP result, whereby jobs generated exceeds 186k and the hourly earnings rate increases +0.2% - 0.3% could result in the dollar strengthening, beyond ¥ 112 per dollar.
If numbers miss estimates, which is likely, the dollar could weaken below ¥110.50
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.
There are multiple ways of trading the NFP report; there are 3 basic strategies to be aware of:
The NFP report affects major currency pairs as well as U.S. market index futures. Traders should take note of: