What are Nonfarm Payrolls (NFPs)?

Nonfarm payrolls (NFPs) are one of the most important macroeconomic reports from the world's largest economy, the US. Published monthly by the US Bureau of Labor Statistics, they represent the change of employment in the nonfarming sector in the US economy.

• Nonfarm payrolls are an employment data release that demonstrates the change in the total number of paid US workers across all major industries and businesses, with the exception of the agricultural industry and general government employees.
• NFPs are monthly employment reports generated and reported by the US Bureau of Labor Statistics. They are typically released on the first Friday of the month for the previous month’s data.
• NFPs are seen as essential statistics and vital economic data in gauging the strength of the US economy, which is the largest in the world.
• NFP releases typically result in high market volatility on specific instruments as traders react to the release surpassing or failing expectations.
• The announcement frequently results in rapid price movements in the stock and forex markets.

How do Nonfarm Payrolls Impact Financial Markets?

Depending on the NFP release, financial markets have a habit and history of reacting quickly and dramatically.

An NFP report showing better-than-expected job growth is a strong indicator that the US labor market is strengthening. Historically, this can and has positively affected markets such as USD and US stocks. Significant job gains are seen as positive for the US economy's prospects.

An NFP report showing weaker growth or missing expectations and forecasts strongly indicates that the labor force is struggling. Therefore, USD and stocks may fall, while safe havens like gold can rise during perceived economic downturns.

What is the Most Important Part of Nonfarm Payrolls?

The headline figure of jobs added per month always gains the most attention and news coverage, but nonfarm payroll data does come with other critical information, including:

• The unemployment rate as a percentage of the overall labor force
• The increase or decrease in jobs across the various employment sectors
• Average hourly earnings
• Private sector jobs growth
• Revisions of previous non-farm payrolls

All the above factors make the markets highly sensitive to each NFP report released, especially if the data differs vastly from market expectations. With each data release, you can expect high volatility in instruments such as US indices and any major currency pairs containing USD and gold.

Why does the Nonfarm Payroll exclude farmers?

NFP data excludes the agricultural industry even though it is a significant sector because farm employment is highly seasonal. Additionally, development in modern technology means farm jobs are decreasing, but overall revenue remains unaffected. Farm employment isn't included in the overall labor force participation rate for these reasons.

The impact of Nonfarm Payrolls on inflation and FOMC interest rate decisions

The Federal Reserve has two main goals: low and stable inflation and high employment. When the markets analyze the Fed's potential future actions, the labor market report is naturally one of the first to consider. Employment growth in the US typically benefits the dollar, as it suggests lower unemployment and can contribute to inflationary pressures. This often leads to a reaction from the Federal Reserve, which may increase interest rates. Higher interest rates, in turn, generally strengthen the US currency.

After the global economy rebounded from the COVID-19 pandemic, inflation started to climb, making Nonfarm Payroll (NFP) reports increasingly critical for understanding the possible direction of US interest rates. The Federal Reserve, aiming to curb inflation while fostering sustainable economic growth, uses tools like raising interest rates.

However, higher interest rates can also slow economic growth if implemented too quickly or aggressively, creating a tricky balancing act for the Fed. Each month's release of NFP data provides investors with key information for assessing whether the Federal Reserve, through its Federal Open Market Committee (FOMC), might adjust its interest rate strategy.

For example, if the NFP figures exceed expectations, it can signal to the market that the Fed considers the US economy strong enough to handle more rate hikes. This is why NFP reports are significant events for many traders.

How do Nonfarm Payrolls Affect the Stock Market?

The nonfarm payroll report can significantly impact stock markets. A strong jobs report could lead to higher stock prices as the market gains confidence about the economy's strength. A weak jobs report may lead to sell-offs in the stock market as investors become concerned about the economy's health.

Which Currency Pairs are Most Affected by Nonfarm Payrolls?

In the forex market, the currency pairs most sensitive to the NFP data releases are the major currencies that are traded against USD, including major pairs such as:

• EURUSD
• GBPUSD
• NZDUSD
• AUDUSD
• USDCAD
• USDCHF
• USDJPY

Breaking: US Nonfarm Payrolls rise by 275,000 in February vs. 200,000 expected

This is a typical headline we may see when the nonfarm employment report is released. In this scenario, the data has surpassed expectations and forecasts, meaning that more jobs were added to the economy than predicted, so we may see a positive reaction in the market - with US-based indices, USD and American stocks gaining value.

What Time is the Nonfarm Payroll Released?

The NFP report is almost always released on the first Friday of the month (with the previous month's data) at 8:30am EST.

What is the Difference between the Unemployment Rate and Nonfarm Payrolls?

The unemployment rate determines how many people in the US are without work, while nonfarm payrolls indicate how many have gained employment in the last month. In addition to NFPs, the US Bureau of Labor Statistics also releases a monthly report called the Employment Situation Summary that closely follows the release of nonfarm payroll data. The Employment Situation Summary, also known as a jobs report, is different from nonfarm payroll and is comprised of two surveys: the Househould Survey and the Establishment Survey.

The Household Survey reports on the unemployment rate, and drills down into employment demographics like race, gender, age, education, disability status, and worker classification.

Key components of the household survey data include statistics such as:

• Overall unemployment rate
• Unemployment rates by gender, race, education, and age
• Reasons for unemployment
• The participation rate
• Alternative employment data

How do Nonfarm Payrolls Affect Different Industries?

Financial markets are interconnected, and while Nonfarm Payrolls have a more immediate impact on financial markets, their extended influence can be found across entire industries, ranging from oil and gas extraction, professional and business services, healthcare, the agricultural sector that's excluded the data and other major industries. This influence can extend to:

• Business confidence
• Consumer confidence
• Government policy
• Hiring and wages
• Supply chains and logistics

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