Fundamental Fun with Orbex: Non-Farm Payrolls

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The biggest event this week for traders is going to be the release of the US Non-Farm Payrolls (NFP), expected at 8:30 EST (14:30 CET). NFP is something of a shorthand for the raft of monthly unemployment data that is released all at the same time. Here are some things to keep in mind for this event.

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Non-Farm Payrolls

The star of the event is by far the NFP figure, which covers the number of jobs added to the economy excluding, as the name suggests, farm workers (which is largely seasonal), but also non-profit and government workers. This gives a better understanding of the “core” movement in employment.

There are two major factors to consider with NFP: on the one hand, increase in employment means that the economy is doing well, employers are expecting the economy to continue going well, and are hiring to meet increasing consumer demand. On the other, increasing payrolls mean there is more money in circulation, and that could lead to higher inflation and concerns of the economy “overheating”. Increased inflation naturally has an impact on the value of the dollar, but also on the expectations of how monetary policy could be tweaked in response.

Besides the headline figure, there are also revisions to the prior numbers. This is why even if the number of employed comes bang in line with expectations, you can have a market move off the revisions if they are significant. Last month’s figures missed considerably (157K v 190K expected), but the bad news was offset by an uptick in the revision for the prior month.

Lately, there has been something of a consensus of expectations around ~180-200K, with numbers broadly out of that range seen as either “very good” if over or “surprisingly negative” if under. The consensus expectation for September is 191K, with last month’s 157K expected to be revised higher.

Up until recently, the ADP released on Thursday was seen something as a guide to what might be expected the next day in NFP. That figure came in at 163K, (which was below the expectations of 190). However, the ADP figure has missed quite a lot lately, leading to it being taken less into consideration and losing some relevance. (For example, last month ADP came in at 219K, but NFP surprisingly came in under expectations at 157K).

Average Hourly Earnings

The co-star of the event is AHE, which measures how much private non-farm workers are paid, and is an indicator both for inflation as well as the tightness of the labor market. This data gets extra attention because it’s closely followed by the Fed since it speaks to the central bank’s dual mandate.

Consensus expectations are average wages to have increased 2.7% y/y, in line with last month. A significant increase in wages could indicate that there is a potential for inflation, and that would make the dollar weaker – unless that potential inflation is enough to lead traders to see it as increasing the likelihood of the Fed increasing rates.

Given the relatively low unemployment rate, this data is also given extra consideration because it can show that it’s becoming harder for employers to find workers – which is a potential indication that the economy is overheating, and could be seen as a negative signal for market makers. This would also increase the likelihood of the Fed intervening.

unemployment rate

Unemployment rate

Although typically popular in conversation and in political discourse, the unemployment rate is typically not seen as relevant to markets as the payroll and wages data. However, a surprise here could also move the markets – especially if the other indicators are in line with expectations. The consensus is that the unemployment rate will drop to 3.8% (3.9% in August).

Often the components of this data get more attention, such as the underemployment rate as well as the labor force participation rate. The latter in particular can be seen as a moderating factor for other data. For example, a sudden and unexpected rise in the unemployment rate can be explained by a sudden increase in the labor force participation rate; ie, that there are now
more people looking for work, not that people have lost jobs (this can explain why the market might go negative for the dollar initially as algos trade off the headline, but recover relatively quickly as the data gets absorbed).

The market moves

Because of how much data comes out at once, the market typically takes some time to adjust – and if there are significant misses, currencies can swing quite a bit in the minutes after the data release. Typically the volatility will die off in a few minutes and the market will settle into a trend; depending on if and what kind of unexpected data comes out.

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