On the first Friday of every month, global investors closely watch a key U.S. report: the non-farm payrolls report (NFP). This report covers a number of job market indicators and has the potential to signal a turning point in the overall health of the U.S. economy, thus affecting Wall Street's expectations of the monetary policy that the Federal Reserve will adopt.
In terms of release time, except for a few exceptions due to market holidays, the non-farm payrolls report is released on the first Friday of each month at 8:30 a.m. Eastern Time. If converted to Beijing time, the corresponding time is 20:30 Beijing time in summer time and 21:30 in winter time. The non-farm data for June will be released at 20:30 on the evening of July 5th, Beijing time.
2024 Non-Farm Schedule
What to look at in non-farm data?
The non-farm payrolls report itself contains a lot of information about the U.S. job market, and most traders and investors will focus on the following key data.
First, new non-agricultural employment: directly reflects the state of the job market. Higher than expected usually indicates a healthy economy, which may drive up the stock market and strengthen the US dollar; lower than expected may indicate a weak economy, leading to a decline in the stock market and a weakening of the US dollar.
Second, revisions: Last month’s data are often revised, which has a significant impact on the market. If the previous data is revised upwards significantly, it may offset the negative impact of less-than-expected data for the month, and vice versa.
Third, the unemployment rate: A lower unemployment rate generally indicates good economic conditions, while a higher unemployment rate may indicate economic challenges. Compared with new non-farm payrolls, the changes in this number are relatively small, and a fluctuation of 0.2% in either direction can be considered a large change.
Fourth, wage data: an important precursor to inflation. Fast wage growth may lead to rising inflationary pressures, prompting the Federal Reserve to raise interest rates; slow wage growth may ease inflationary pressures. Traders pay close attention to this data to assess the future direction of monetary policy.
Fifth, the labor force participation rate: the proportion of the population that is eligible for work and willing to work to the total working-age population, used to assess the true state of the job market. Even if the unemployment rate falls, if the labor force participation rate also falls, it may indicate that more people are withdrawing from the labor market, which is not necessarily a sign of economic health.
How the Fed views non-farm payrolls
The Fed has a dual mission: to achieve full employment and price stability, with price stability referring to 2% inflation. However, ironically, these two tasks of the Fed often conflict with each other. A hot job market will lead to rising inflation and soaring prices, while policies to reduce inflation will often lead to a worsening job market. The two are prone to falling into a vicious cycle, and it is not easy to achieve a balance.
Therefore, in addition to non-farm payrolls and unemployment, the Fed pays special attention to wage data because it is closely related to inflation. When wages rise too quickly, the economy is in danger of overaccelerating, which makes the need for rate hikes a focus of market attention. Higher interest rates increase the cost of doing business, which has a negative impact on the economy. When business costs are higher, expansion will be reduced, and less expansion means less demand for employees and less wage inflation pressure.
Falling wage growth is a precursor to a recession. It happens because businesses have too many employees to choose from. They can afford to pay less for the same work because someone will take it, no matter how low the salary. In this environment, the Fed faces the dual problems of slowing economic activity and a weak labor market, both of which can usually be addressed by lowering interest rates. Lower interest rates make it cheaper to do business and are an incentive for economic expansion.
The market influence of non-farm payrolls
Financial markets react quickly and violently to the release of non-farm payrolls, which is why traders need to understand the potential market reaction to the data. If the actual published value is far from the consensus of economists, it may trigger significant financial market volatility. Therefore, the market is highly sensitive to non-farm payrolls, and traders should be more vigilant if they hold open positions in any financial assets that may be affected. The following are the theoretical impacts of the non-farm payrolls report on major financial assets:
1. Foreign exchange market
US Dollar: Strong non-farm payrolls (i.e. higher-than-expected job creation) typically boosts the dollar as it means the economy is doing well and could prompt the Federal Reserve to raise interest rates. Conversely, weak data could lead to a weaker dollar.
Major currency pairs (such as EUR/USD, GBP/USD): Under the influence of non-agricultural data, if the US dollar strengthens, currency pairs such as EUR/USD and GBP/USD will fall; if the US dollar weakens, these currency pairs will rise.
2. Stock Market
U.S. stock market (such as S&P 500, Dow Jones Industrial Average): Strong non-farm data may indicate strong economic growth, thus boosting the stock market. However, overly strong data may also raise concerns about interest rate hikes, thus curbing stock market gains. Weak data usually has a negative impact on the stock market, but it may also trigger expectations of loose policy from the Federal Reserve, thus boosting the stock market in the short term.
Industry sectors: When non-farm data performs well, cyclical industries (such as finance and industry) usually benefit; on the contrary, defensive industries (such as utilities and consumer goods) may perform mediocrely.
3. Bond Market
U.S. Treasury yields: Strong non-farm data usually leads to higher Treasury yields, as the market expects the Federal Reserve to raise interest rates to prevent the economy from overheating. Conversely, weak data may lead to lower Treasury yields.
Bond prices: move in the opposite direction to yields; when yields rise, bond prices fall, and vice versa.
4. Commodities
Gold: As a safe-haven asset, gold usually rises when non-farm data is weak (indicating economic weakness or increased risk). On the other hand, gold prices usually fall when the data is strong (indicating a healthy economy and rising expectations of rate hikes).
Oil: Oil prices react more complexly to non-farm payrolls data. Strong data may push oil prices up, as economic growth is usually accompanied by increased energy demand; but if strong data triggers expectations of rate hikes and leads to a stronger dollar, oil prices may fall, as a stronger dollar usually suppresses the prices of commodities denominated in dollars.
5. Other assets
Cryptocurrency: The cryptocurrency market reacts indirectly to the non-farm payrolls report, but as institutional investors participate more, the market may begin to show similar reaction patterns to traditional markets. Strong non-farm payrolls data may have a negative impact on major cryptocurrencies such as Bitcoin, as they are often seen as a hedge against inflation or economic uncertainty.
Key Considerations
In general, the non-farm payrolls report has a broad and far-reaching impact on major asset classes by influencing investors' expectations of the health of the economy and the Fed's policies. However, given that financial markets are simultaneously pulled by multiple bullish and bearish factors, the market trend may not always conform to theory. Moreover, the initial market reaction is often very volatile because it is driven by the overall non-farm payrolls data. After a few minutes, the financial market tries to fully digest the entire non-farm payrolls report, which can sometimes trigger a complex market reaction.
For example, in October 2023, the US non-farm data for September exceeded expectations, and the data for the previous two months were significantly revised upward, which led to a sharp increase in investors' expectations for the Fed's interest rate hikes, and the market once staged a "double kill of stocks and bonds". But then the market reversed dramatically, with US bond yields gradually giving up more than half of their gains, the three major US stock indexes turning positive during the session, and technology stocks rising across the board.
Therefore, traders and investors should pay more attention to risk management before and after the data is released to avoid unnecessary and unexpected losses caused by sharp market fluctuations.
The article is forwarded from: Jinshi Data
