Labour market surveys

What is it?

Without a shadow of a doubt the most important economic statistic for me is the US
nonfarm payrolls (NFP) report. It is published by The Bureau of Labor Statistics and
measures the number of jobs created in the nonfarm sector of the US economy each
month.

When is NFP data released?

The first Friday of every month.

Why is NFP data significant?

American labour market statistics are important because they give an idea about the
confidence of American businesses for the future. If a company believes growth will
be strong for their product or service going forward they will hire more workers to
meet the expected increase in demand. If they think demand is going to contract they
will reduce their employee numbers.
Hiring by firms also has an impact on consumer confidence. If people have stable
jobs then consumer confidence should be high and they will spend money, whereas
if people are losing their jobs the first thing they usually do is cut their spending.
Since consumption makes up 70% of the US economy (a level that is far from
unique in the West) and jobs are a key component of whether or not consumers are
spending, you can understand why the market is so obsessed by this indicator.
NFP data has an enormous impact on all financial markets. Currencies can move
more than they customarily would on any normal day and it’s not unusual for the
major dollar crosses to move a couple of hundred pips in either direction. Stock
markets across the globe are also on high alert. Due to the huge amount of volatility
that this data can generate, many traders in Asia and Australia stay awake or get up
in the middle of the night to place a trade.

FX market example

Lots of people trade before, during and after nonfarm payrolls, and for some of the
major FX brokers it can be their busiest day of the month. But I will let you in on my
secret: I don’t trade the NFP release.
A colleague of mine used to sit patiently looking at his Bloomberg terminal on NFP
Friday, as the payrolls report is called by the street, and when the number was
released he looked at it, digested it and went about doing something else. He chose
not to trade the actual figure itself.
This is an important lesson to all traders – economic data like the NFP can produce
extremely volatile movement in the markets so some people prefer to wait for the
dust to settle and trade when they have a better idea of what effect the NFP data has
had. I follow this strategy (or non-strategy) over an NFP release.
Figure 1.1 shows you how volatile the immediate aftermath of an NFP release can
be. I have chosen to show the impact the August 2012 data (released on 6
September) had on EURUSD, but it has a similar effect on USDJPY, AUDUSD,
GBPUSD, etc. This was the EURUSD’s initial reaction to a disappointing payrolls
number; the forecast was for a 130k gain in the number of jobs created, but the
reality was that only 96k were created and this was considered a disappointment.
The data was released at 13.30 BST and the initial reaction was that the euro sold off
sharply, dropping from 1.2650 to 1.2590 in a matter of seconds. It then meandered
lower to 1.2570 before rebounding strongly to 1.2650 – back to where it started! –
before the end of the London session. This shows you how erratic the market can be
during this data release.
There are many reasons why the market can be so erratic on NFP Friday. Firstly,
NFPs are one of the earliest releases each month and they are a bit like a new piece
of the US economic jigsaw. Since the economy in the US is a complex beast, new
information about its strength or weakness can cause shock waves in the financial
markets, particularly the FX market. Secondly, hundreds of billions, if not trillions,
are being traded during the release, which also causes excess volatility.

In the above example it would have been so easy to get caught on the wrong side of
that trade. NFP data can be particularly hard to predict so rather than take a bet on
whether the number will beat or miss expectations, I wait it out.
Instead my trading strategy for NFPs is more long term. I do two things immediately
after the NFP release:
1. Digest what the data is showing; and
2. Decide if that is good or bad for the future trajectory of EURUSD.
On this occasion the data miss was extremely significant as it rounded off a week of
bad economic data from the US. This data added to the body of evidence that the US
economy was slowing down and would need some help from the US central bank to
get going again (see the interest rate section for more).
Since central bank stimulus in the past has been dollar negative, I decided to put on a
long EURUSD trade at 1.2650. Some may argue that I bought at the high of the day –
how can that be a good trade!? – but in Figure 1.2 you will see that EURUSD rallied
a staggering 400 points in the week after the NFP data was released. The circled area
shows where I entered the trade, on 6 September 2012.