Non Farm Payroll (NFP) is one of the most influential economic indicators in the United States, capable of dramatically changing the mood in global financial markets in a matter of minutes. This indicator reflects the change in the number of jobs in the non-agricultural sectors of the American economy and is published monthly on the first Friday. Statistics Pocket Option shows that on the day of the NFP release, the volatility of major currency pairs increases by an average of 180%.
Research The academies of trading confirm the critical importance of this release: 67% of the monthly extremes of the US dollar are formed within 24 hours after the publication of the NFP. The indicator affects not only the foreign exchange market, but also stock indexes, bonds and commodities. At the same time, 78% of novice traders underestimate the impact of NFP on market dynamics.
The essence of the indicator: what NFP measures
Non Farm Payroll literally translates as “non-agricultural payroll”. The indicator calculates the number of new jobs created or lost in the American economy per month, excluding the agricultural sector, government agencies and non-profit organizations.
The indicator is calculated by the Bureau of Labor Statistics based on a survey of approximately 142,000 enterprises and government agencies. This large-scale survey covers about 689,000 jobs, which is one third of all non-agricultural workers in the country.
The key features of the NFP calculation include important methodological aspects:
- The survey is conducted during the week, including the 12th day of each month, to ensure comparability of data.
- Only employees who receive salaries directly from their employer are counted, excluding the self-employed.
- Temporary and seasonal employees are included in the statistics along with permanent employees.
- The data is adjusted for seasonal factors to eliminate distortions from holidays and weather conditions.
- The preliminary figures may be revised over the next two months as additional information becomes available.
The exclusion of agriculture is explained by the high seasonality of this sector and its relatively small share in the modern American economy. Agricultural workers make up less than 2% of the total employment, but their number varies significantly depending on the time of year.
Civil servants are also not counted in the main indicator, as their hiring and dismissal are often related to political decisions rather than economic conditions. However, government employment data is published separately in a detailed report.
Publication calendar: market time and expectations
The NFP is published monthly on the first Friday of the month at 08:30 US Eastern Time (15:30 GMT). This date was not chosen by chance — by the first Friday, most companies manage to submit employment reports for the previous month to the Bureau of Labor Statistics.
A few days before the official publication, economists from leading banks and analytical agencies publish their forecasts. A consensus forecast is formed as a weighted average of all predictions, and it is the deviation from this consensus that determines the strength of the market reaction.
The chronology of events surrounding the publication of the NFP follows a clear schedule:
- A week before the release, preliminary forecasts of major investment banks and analytical companies are published.
- In 2-3 days, the final consensus forecasts are released, which are guided by the majority of market participants.
- On Wednesday, before the NFP, the ADP report on private employment is published, which is considered a harbinger of the main indicator.
- On Thursday, data on initial applications for unemployment benefits are released, complementing the picture of the labor market.
- On Friday at 08:30 EST, the official NFP is published along with the unemployment rate and wage growth.
Historically, a strong market reaction occurs when actual data deviate from the forecast by 50,000 jobs or more. A deviation of 100,000+ places practically guarantees significant movements of the main currency pairs by 100-200 points within the first hour after the release.
The market is also closely following the revision of data from previous months. Significant adjustments may change the perception of labor market trends and affect policy expectations of the US Federal Reserve System.
Impact on financial markets: mechanisms of impact
NFP has a multi-stage impact on various asset classes through multiple transmission channels. The primary effect is seen in the foreign exchange market, where the US dollar reacts to changes in the perception of a country’s economic strength and the likelihood of interest rate changes.
Strong NFP data (exceeding the forecast) usually strengthens the dollar, as it indicates the health of the economy and increases the likelihood of a tightening of the Fed’s monetary policy. Weak data has the opposite effect, weakening the US currency.
The mechanisms of NFP’s influence on various markets demonstrate a complex relationship:
- The foreign exchange market reacts immediately through a change in expectations for interest rates and economic growth in the United States.
- The stock market is showing a mixed reaction: strong employment supports corporate profits, but may increase inflationary pressures.
- The bond market is moving in the opposite direction to the dollar: a strong NFP boosts yields due to expectations of rising rates.
- Gold usually falls with strong NFP data due to the strengthening of the dollar and rising real interest rates.
- Oil may react through the dollar channel and expectations of economic activity in the United States.
Stock indexes show a more complex reaction. In times of economic uncertainty, a strong NFP supports stocks as a sign of stability. However, in the context of inflation concerns, the same data may put pressure on the market due to expectations of tightening monetary policy.
The temporal structure of the reaction is also important. The immediate response in the first 5-10 minutes is often the most volatile, but it does not always reflect the final assessment of the market. A more balanced reaction is formed within the first 2-4 hours after the release.
Correlation with other economic indicators enhances or weakens the impact of NFP. When the data confirms trends observed in other indicators (GDP, inflation, retail sales), the market reaction is usually more pronounced and stable.
Trading Strategies: how to use NFP
Trading on NFP news requires a special approach due to the extreme volatility and unpredictability of short-term movements. Professional traders use several basic strategies adapted to the specifics of this event.
The “before the news” strategy involves opening positions 30-60 minutes before the release based on technical analysis and expectations. This approach requires a clear understanding of the consensus forecast and a willingness to close quickly in case of adverse developments.
The main trading approaches to NFP include different time horizons:
- Scalping in the first minutes after the release uses maximum volatility for quick gains and losses.
- Intraday trading focuses on trends that form within 2-6 hours after the data is published.
- Position trading uses NFP as a catalyst for medium-term movements lasting several days.
- Hedging allows you to protect existing positions from unexpected movements when data is released.
The “breakout” strategy is based on placing pending orders above and below the current price level before the release. If there is a strong movement in either direction, one of the orders is activated, allowing you to catch the beginning of the momentum.
The “fade” technique involves trading against the initial reaction in the expectation of a rollback to fair value. This approach works when the market overreacts to data, but requires expertise in identifying extreme movements.
Risk management in NFP trading is critically important. The recommended position size should not exceed 1-2% of the deposit due to high uncertainty. Stop losses are set wider than usual to account for increased volatility.
Many traders prefer an observant position on NFP day, using the information to plan trading for the next week. This conservative approach avoids the risks of short-term volatility while maintaining the ability to use medium-term trends.
Data interpretation: what is important for traders
Proper interpretation of NFP data requires understanding not only the main indicator, but also the accompanying components of the report. The unemployment rate, the average hourly wage and the number of hours worked complete the picture of the labor market.
The average hourly wage is particularly important for assessing inflationary pressures. An increase in wages above 3-4% per annum may signal an overheating of the labor market and a potential acceleration of inflation, which affects the expectations of the Fed’s policy.
The key components of the report require a comprehensive analysis to fully understand:
- The main NFP indicator shows the direction of employment changes, but does not reveal the quality of new jobs.
- The unemployment rate may move independently of the NFP due to changes in the size of the workforce.
- The labor force participation rate reflects the proportion of the population actively looking for work or already working.
- The average length of the working week indicates the intensity of the use of existing employees.
- Revisions of previous months can change the perception of trends even with neutral current data.
The context of the publication influences the interpretation. In times of recession, the creation of even a small number of jobs is perceived positively. In conditions of full employment, the same numbers may raise concerns about overheating of the economy.
Sectoral analysis adds depth to understanding. An increase in employment in manufacturing signals the strength of the real sector, while an increase in the service sector may reflect consumer activity. Government employment is often linked to policy decisions and is less informative for assessing economic trends.
Seasonal factors also require attention. January data is often distorted by layoffs after the holidays, May data is distorted by hiring seasonal workers, and December data is distorted by temporary trading positions.
The connection with other indicators helps to check the reliability of the signals. A strong NFP, not confirmed by an increase in consumer spending or industrial production, may turn out to be a statistical outlier.
Conclusion
Non Farm Payroll remains one of the key drivers of short-term volatility in financial markets. Understanding the mechanisms of its impact helps traders better prepare for trading on the day of release and use the information for medium-term planning.
Successful work with NFP requires a comprehensive approach: analysis of not only the main indicator, but also related data, understanding of the market context and strict risk management. Novice traders are advised to first observe the market reaction before actively trading on this data. Pocket Option provides convenient tools for tracking the economic calendar and trading on important release days. Community The Trading Academy unites traders who are ready to share their trading experience on fundamental events.
