What is NFP and how does it affect the market?
What Is NFP?
Non-Farm Payrolls, or NFPs, are a major economic indicator that the US Bureau of Labour Statistics (BLS) releases each month. With the exception of farm labourers, government employees, employees of private households, and employees of non profit organisations, it reflects the total number of paid workers in the United States. An essential source of information for assessing the general state of the American labour market and economy is the NFP report.
What information can be found on an NFP report?
Employment Numbers: This headline statistic shows how many jobs were created or lost in the US economy in the preceding month.
Unemployment Rate: The percentage of the labour force that is unemployed and actively looking for work is known as the unemployment rate.
Average Hourly Earnings: Indicates changes in workers’ pay and may be an indication of impending inflationary pressures and wage growth.
Labor Force Participation Rate: The percentage of people in the working age group who are either employed or actively looking for work is known as the labour force participation rate.
How does NFP affect the market?
Forex Market
US Dollar (USD): The NFP report has a big influence on the USD’s exchange rate. Because it shows a strong economy, an NFP number that is higher than anticipated usually enhances the USD, whilst a number that is lower than expected may weaken it.
Currency Pairs: Around the release of the NFP report, major currency pairs including EUR/USD, GBP/USD, and USD/JPY frequently see a spike in volatility.
Stock Market
Equities: As strong NFP data portend economic growth and maybe better corporate earnings, they typically cause a favourable attitude in the stock market. On the other hand, poor performance might lead to a drop in stocks.
Impact on Sector: Because they depend so heavily on the state of the economy, some sectors—like consumer discretionary and industrials—may be particularly vulnerable to changes in employment data.
Bond Market:
Treasury Yields: As investors anticipate higher interest rates owing to economic growth and possibly inflation, a positive NFP report may result in higher Treasury yields. In contrast, a poor assessment could cause yields to drop.
Expectations for Inflation: The NFP report’s wage growth data is frequently monitored for indications of inflation, which can affect bond yields and prices.
Commodities Market:
Gold: Although it is sometimes seen as a safe-haven asset, positive NFP statistics might cause gold prices to drop as a result of a stronger USD and rising interest rates, which would reduce the appeal of non-yielding assets like gold.
Oil: Positive jobless figures may raise hopes for increased energy use, which might drive up oil prices.
Summary
NFP data is used by investors to assess the state of the economy and make necessary portfolio adjustments. Strong NFP figures, for example, can encourage investors to expand their exposure to growth-oriented assets, whereas low numbers might encourage them to switch to defensive assets.
All things considered, the NFP report is an important source of economic information that affects many different financial markets, which is why traders and investors around the world pay close attention to it.