Wage data can also be a signal on the tightness of the labor market, as steady increases in wages are consistent with supply falling short of demand. Wages are also seen as a signal on the health of the US consumer. High wage growth is consistent with consumers having a strong purchasing power, but that can also become a negative signal if the economy is overheating and inflation concerns arise leading some to believe that monetary policy could be tightened. Meanwhile, faltering employment or wage numbers can signal that consumer may tighten the purse strings, but it can also signal incoming rate cuts.
The report gives out not just the headline on new jobs added within the economy, but also details changes in unemployment by sector and demographics. This can help us to dive deeper to analyze the health of certain sectors. For example, the services sector collapsed during the pandemic but has shown a strong recovery after the global reopening.
In summary, this data set gives a comprehensive look into the US jobs market, which can be a leading indicator for economic growth and a key input for policymakers. However, the direction may not always be entirely clear, which is what usually leads to a lot of volatility. Just remember that one month’s data can have little information value, and it is always more important to look at trends in the economy and a cumulative set of different data points when making investment decisions.
Market instruments that can react to NFP
The NFP report can potentially create a large market volatility. While this may create profit opportunities for some traders, the erratic price movements also mean that spreads can widen and lead to margin calls. Therefore, it is important to have strict risk management rules in place, such as stop-losses or minimal/no use of leverage, when trading the NFP report. Most commonly used instruments to express a view on the NFP include:
- Indices like NASDAQ (USNAS100.I) or S&P 500 (US500.I)
- USD FX pairs such as EURUSD and USDJPY
- US Treasury Bonds
- Yield-sensitive commodities like Gold and Silver
- Other commodities that are priced in dollar, such as crude oil
Traders should take note that some of the other currency cross pairs beyond the USD pairs may also display an increase in volatility when the NFP releases.
How to trade the NFP?
This usually means that you trade in the direction of the release. This strategy is mostly suitable when there is a broad-based beat or miss in the various data points of the NFP report compared to consensus.
For instance, if the headline jobs numbers, unemployment rate and wage data, all signal a robust US jobs market, that can be a positive signal on the US economy. But depending on where growth and inflation is in the current cycle, if the market expects that Fed has more ammunition to tighten monetary policy, then that is a positive for US dollar but negative for risk assets and equities.