The short and simple answer to the question – does NFP affect the stock market? – is YES. In fact, the NFP data releases are among the most anticipated data releases in any financial market, let alone the stock markets.
But what exactly is NFP, and how does it impact the stock markets? In this article, we will explore all the information that stock traders and investors need to know about NFP, including how they can use its data to their advantage.
What is NFP?
Nonfarm Payrolls, commonly abbreviated as NFP, is an economic indicator that shows the total number of non-farm workers in the US. Non-farm workers include all the workers in the US except the farm workers, government employees, private household employees, proprietors and non-profit employees.
The Non-farm payrolls report also includes data on the unemployment rates by gender, age, education and race; reasons for unemployment, average working hours and hourly earnings and the participation rate.
Nonfarm payrolls are released by the Bureau of Labor Statistics (BLS) on the first Friday of every month at exactly 8.30 A.M EST. When they are released, economic analysts use the data in the report to analyze and predict the economic situation in the US
How does the US NFP Impact The Financial Markets?
When analyzing the NFP data, economists look at two things – are the NFP figures higher or lower than the previous months, and have they met the market expectations or not.
If the NFP figures are high, it indicates a healthy labor market and hence a growing economy. On the other hand, low NFP figures indicate that more people are jobless, hence a failing economy.
The same goes for market expectation. If the NFP figures exceed the expectations, it indicates that the economy is growing, but if they fail to meet the forecasted expectations, it shows that the economy is depreciating.
Because it influences the economy, the NFP has a major impact on both the forex and stock markets.
How US NFP impacts Forex
The NFP impacts forex by influencing the strength of the most traded currency in the forex market (the US dollar) and how the traders trade it.
When the NFP figures are high, or when they exceed the forecasted figures, it is an indication that the US economy is growing and that the value of the USD currency is growing with it.
Because of this increased strength against other currencies, market participants will be more optimistic about buying or investing in the USD.
On the other hand, when the NFP figures are negative, or they do not meet the figures forecasted by economists, analysts might take that as an indication that the US economy is depreciating and, with it, the US dollar. Market participants will therefore be less inclined to buy or invest in the USD.
How Non-farm Payrolls impacts Stock Markets
Economy is one of the major factors that move the stock indexes and the stock market in general, and it is not difficult to see why. A growing economy means more trading opportunities in the stock exchange market, just as a failing economy means the opposite.
As an economic indicator, the NFP is used to not only measure the growth of the US economy but also dictate how that growth will affect the trades in the stock exchange market.
When the NFP figures are positive or exceed the market expectations, analysts take that as an indication that the US economy is growing and, with it, the US stock market exchange.
Because of this, stock traders will be more inclined to invest in stock indices based in the US like the Dow Jones, NASDAQ and S&P 500.
On the other hand, negative NFP figures that fail to meet the market predictions are bad news for the stock exchange market.
Because they indicate a failing economy, these figures will make stock traders lose faith in the US stock market and be less optimistic about investing in the US stock indexes.
NFP’s influence on commodity trading
Due to its effect on the US economic strength and the value of the dollar, the NFP affects the gold prices, gold futures, and the demand for oil, gas and energy.
How to trade NFPs
When the NFP figures are released at exactly 8.30 A.M EST on the first Friday of each month, they find traders, investors, brokers and any market participant already on their toes. These figures, after all, determine what trading decisions they will make and if the decisions will increase their returns and profits.
For this reason, the period after the release of the NFP figures creates high volatility and more trading opportunities in the market.
While an inexperienced trader might jump at the numerous opportunities created by the NFP data releases, an experienced trader will establish a more strategic move to ensure they get the most out of the opportunities.
There are two strategies that traders use when trading the NFP report – the long-term trend and the near-term news.
- The long-term trend – traders who use this strategy focus on the long-term perspective of what the NFP report indicates rather than the current figures.
These traders use the present NFP data to confirm an existing trend and identify any key major turning points on the trend that might influence their decisions.
If the NFP figures are strong and point towards a continuing bullish market trend, the traders will trade on the bullish signals presented on the price chart. But if the figures point towards a major key turning point that changes the trend to bearish, the traders will avoid those trades.
The long-term trend NFP trading strategy is preferred to near-term news because it gives the trader time to think and strategize rather than jump in on the initial swings of the volatile trading days
- Near-term news – Unlike in the long-term trend where traders compare present and past NFP figures and establish a trend, near-term news traders compare whether the current figures have met the expectations of the market or not.
The traders then only trade if the NFP figures meet the expectations of the market. Otherwise, they do not trade.
One flaw with this strategy is that it has little risk management because traders tend to make risky and unwise decisions because of the market influence.
Because of its massive influence on the economy, the forex market and the stock exchange market, traders should always keep an eye out for the NFP data releases. Apart from presenting them with many trading opportunities, the NFP reports can also help long-term traders analyze market trends.
Create an account with Tixee now to start trading the NFP!
Frequently Asked Questions
- How did the stock market boom when American life soured?
During the Corona-virus pandemic, instead of the stock exchange market facing a decline as many other economic sectors did, it actually boomed and hit record-high profits.
This success can be attributed to the Fed, which made expansionary monetary policy decisions that supported the economy and the stock markets.
- What does the Stock Market represent, and what does it not?
Contrary to popular belief, the stock market does not represent the real economy. Rather, it represents the value of the stocks based on their future cash flows. The economy, on the other hand, presents GDP growth rates based on past data.
- What are the NFP dates of 2021
The NFP dates in 2021 are 8th January, 5th February, 5th March, 2nd April, 7th May, 4th June, 2nd July, 6th August, 3rd September, 8th October, 5th November, and 3rd December.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.