Get Ready to Trade on The NFP
One of the most interesting recurring events from the beginning of every month is the Nonfarm Payrolls (NFP). It can impact a lot of assets, from indices to currencies, shares and commodities, as well as the cryptocurrencies (mostly the ones traded against the USD). So make sure to follow this weeks’ NFP release, whatever asset you want to trade.
Why should you care about the NFP?
The NFP is probably one of the most significant events for the US economy. According to Investopedia, it shows how 80% of the United States’ non-agricultural sectors are performing, by counting their total payrolls. Moreover, back in 1977, the US Congress decreed that the dual purpose of the Federal Reserve would be to effectively reach maximum employment and ensure stable prices, aside from moderating the interest rates.
Based on this powerful indicator, investors worldwide can assess how the US economy, and implicitly its Indices and part of its shares will be performing. And since most of the commodities, currencies and cryptocurrencies are also traded in USD, you definitely should follow this event before planning your next move.
In simpler words, the NFP is measuring the employment change for the previous month (which is why the NFP published in May will talk about the situation for the month of April), from all the industries of the US, except for the farming sector. Basically, the NFP can hint not only on the GDP outcome, but the Interest Rate and economic policies as well.
Still surprised that one of the most anticipated events, from the beginning of every month, is the US Nonfarm Payrolls? Then read on, to find out more interesting facts about the NFP.
Memorable negative NFP results
Going all the way back to the ’70s on the line of the worst NFPs in history, there have been recorded just two other times the nonfarm employment registered a drop larger than 600,000 jobs. Consider that the first time this happened was during January 1975, with 604,000 fewer jobs, while the latest was only 11 years ago in April 2009, when the NFP saw a drop of 663,000 jobs.
We’re already facing the largest drop so far known in the history of the NFP with more than 701,000 jobs lost, mostly due to the Pandemic taking over pretty much the entire world. But what we really want to know is what will happen with the US economy if Investing.com’s forecast of an actual drop of 20 million jobs in the non farm sectors of the US will become reality?
Preceding the NFP – the ADP employment report
Every month, two days right before the Nonfarm Payrolls report is published, the US independent firm Automatic Data Processing (more commonly known as ADP) releases a report measuring the private non-agricultural employment level.
The ADP Nonfarm Employment Change analyses the results it gets from over 400,000 private US companies. Although this month is expected to register only half of the previous month’s drop according to Investing.com, the April ADP report anticipates, nonetheless, a significant drop of over 13,000 employment claims.
Based on the ADP outcome, you have a better chance at understanding how the NFP might come out, allowing you to better schedule or change your transactions accordingly.
The economy in the times of Pandemics
Given that we’re yet to see the outcome of this pandemic, many analysts are reverting their attention to previous similar events. The last pandemic recorded, the 1918 Spanish Flu, also majorly hit the US economy.
According to an investigation published by Forbes, quoting the Fed board economist Sergio Correa, New York Fed researcher Stephan Luck and MIT’s Sloan School of Management Emil Verner, it was in fact the Spanish Flu Pandemic that hurt the economy, and not the political response to it. In fact, they wrote, countries that managed to take containment measures on time weren’t hurt economically as much as those that delayed responding to the crisis.
One thing is certain though, worldwide economies will be affected by this great crisis. However, we’re yet to know the magnitude of the hit each country will receive, as the quoted specialists say, based on their promptitude to respond in front of this threat.
What can we expect from this NFP?
One last thing you should understand when it comes to the NFP, and economic events in particular, is the fact that market forecasts can also greatly impact, well… their impact on the markets.
In the case of this week’s NFP, if the expectations are met, the market might surprise us by not reacting to the news, having already followed its course by the time of the release. However, if the result will be lower than expected, it would hint that there have been fewer payrolls processed over the month of April in the US. This would also potentially indicate a higher unemployment rate. In this case, the main assets that are influenced by it could drop.
It goes without saying that if the drop in non-agricultural payrolls will be lower than expected, or in the very unlikely case where the US would register an increase in non-agricultural payrolls, the economy could receive some support, pushing the main assets impacted by the NFP in a recovery or an up-trend.
Although this is how the market reacts to such events under normal conditions, you always need to have your account prepared for the unforeseen, and a good Risk Management plan ready. If you need more information regarding the NFP, trading strategies, or even Risk Management plans, make sure to follow Michalis’ webinars or subscribe to our YouTube Page.