The Monthly Non Farm Payroll Number Has the Power to Move Markets
Arguably, the most important economic data point released each month is the Non Farm Payroll (NFP) report issued by the U.S. Bureau of Labor Statistics (BLS). The widely anticipated and handicapped NFP report creates market volatility before and especially after its release. Indeed, such is the excitement surrounding this report, financial television program CNBC conducts a “final countdown” in the half hour prior to the release of the NFP report.
What is The Non Farm Payroll Report?
The NFP report is produced by the BLS and released about a week after the end of each month. The NFP report gives a snap shot of the health of the U.S. labor market. The NFP report purports to count the number of private sector jobs created in the prior month, excluding government, private household and farm jobs. The NFP report also includes the unemployment rate, the labor force participation rate, the number of people working part time, the segments of industry where jobs were created or lost, the average weekly hours worked and average hourly earnings.
Shifting through all that data might provide one with substantial clues on the health of the U.S. economy (if one is comfortable with the methodology of how the BLS collects and presents its findings). Yet, most of the data in the NFP report is ignored by traders. The bulk of market trading is done on the basis of the top line job number in the report – How many jobs were created or lost? Trading after the release of the NFP is done largely on the basis of whether the number of jobs created or lost according to the BLS is higher or lower than the expected top line number. Unless any of the other indicators in the report shift wildly, nearly all the attention will be paid to the top line number of jobs created or lost.
Is the Influence of the Non Farm Payroll on Markets Waning?
Perhaps in the short term. Because the NFP report supposedly is highly indicative of the overall strength or weakness of the U.S. economy, it will continue in turn to impact monetary policy, the stock, bond and precious metals markets. Whether an additional 22,000 waitress jobs were created or 6,000 mining jobs were lost, probably shouldn’t matter much to markets, but it does. In the coming months, however, the NFP report may hold less sway over markets.
Because the Fed has often stated that interest rate increases depend on further improvement in the labor market, the NFP report is closely watched for clues on the direction of interest rates. Brexit and global uncertainty have pushed the NFP report down on the list of data points for any potential rate hikes. Absent the Brexit leave vote last month, however, a strong top line NFP report like the one on Friday (+287K jobs vs expectations of 187K), would have had market watchers predicting imminent rate hikes for the July meeting and gold and silver would have plummeted.
Indeed, gold and silver did plummet immediately after the release of the NFP report on Friday, but recovered their losses within a half hour of the report’s release and resumed the upward path they were on prior to the release of the report. The dollar spiked on the issuance of the NFP report but quickly gave up its gains
In the aftermath of Brexit, Fed false alarms re raising interest rates and a growing awareness that wage growth is not accompanying the reports of job growth, market movements after the non farm payroll release may be muted absent a string of extremely strong or weak reports. In the coming months the impact of Brexit and global economic uncertainty will probably remain more important than the NFP report.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.