Every first Friday of the month, global investors are closely watching a key report from the United States: the Non-farm Payroll (NFP) report. This report covers multiple employment market indicators and may indicate a turning point in the overall health of the U.S. economy, thus affecting Wall Street's expectations for the monetary policy that the Federal Reserve will adopt.

Regarding the release time, the Non-farm Payroll report is published at 8:30 a.m. US Eastern Time on the first Friday of each month, except for a few exceptions caused by market holidays. In terms of Beijing time, it corresponds to 20:30 during daylight saving time and 21:30 during standard time. The Non-farm data for June was released on the evening of July 5 Beijing time.

Non-farm schedule for 2024.

What to look for in non-farm?

The Non-farm report itself covers a lot of information about the U.S. job market, and most traders and investors will focus on the following key data.

First, non-farm payroll: directly reflects the employment situation of the job market. Higher than expected usually indicates economic health, which may drive stock market gains and the strengthening of the dollar; lower than expected may indicate economic weakness, leading to stock market declines and a weaker dollar.

Second, revisions: last month's data often gets revised, which can have a significant impact on the market. If the previous data was significantly revised upwards, it may offset the negative impact of the current month's lower-than-expected data, and vice versa.

Third, the unemployment rate: a lower unemployment rate usually indicates a healthy economy, while a higher unemployment rate may indicate economic challenges. Compared to the addition of non-farm payrolls, changes in this number are relatively small, fluctuating 0.2% in either direction considered a significant change.

Fourth, wage data: an important precursor to inflation. Fast wage growth may lead to rising inflation pressure, prompting the Federal Reserve to raise interest rates; slow wage growth may ease inflation pressure. Traders closely watch this data to assess the future direction of monetary policy.

Fifth, labor force participation rate: the proportion of the population of working age who are in the working population and willing to work, used to evaluate the real situation of the job market. Even if the unemployment rate drops, if the labor force participation rate is also declining, it may indicate that more people have dropped out of the labor market, which is not necessarily a sign of economic health.

How does the Federal Reserve view non-farm?

The Federal Reserve has a dual mandate: to achieve full employment and price stability, with price stability referring to 2% inflation. However, ironically, these two tasks of the Federal Reserve often contradict each other. A hot job market can lead to increased inflation and soaring prices, while policies that reduce inflation tend to worsen the job market, and the two are easy to fall into a vicious circle.

Therefore, in addition to non-farm payroll and unemployment data, the Federal Reserve also pays special attention to wage data, as this is closely related to inflation. When wages rise too fast, the economy faces the danger of excessive acceleration, which makes the necessity of raising interest rates the focus of the market's attention. Higher interest rates raise the cost of doing business, which can have negative effects on the economy. When operating costs are higher, expansion will decrease, and a decrease in expansion means a decrease in demand for employees and a decrease in wage inflation pressure.

A slowdown in wage growth is a harbinger of economic decline. When wage growth slows down, it is because there are too many employees to choose from. They can pay less for the same work because no matter how low the salary is, someone will accept it. In this environment, the Fed faces the dual problems of slowed economic activity and a sluggish labor market, which can generally be solved by cutting interest rates. Lower interest rates reduce the cost of doing business and are an incentive to economic expansion.

Market impact of non-farm

After the release of non-farm data, the financial markets will make a rapid and intense reaction, which is why traders need to understand the potential reaction of the market to the data. If the actual published value is significantly different from economists' consensus, it may trigger significant turbulence in the financial markets. Therefore, the market is highly sensitive to non-farm data, and if traders hold open positions in any financial asset that may be affected, they should be more vigilant. The following is the theoretical impact of non-farm reports on major financial assets:

1.Forex market

US dollar: Strong non-farm data (i.e., higher-than-expected addition of jobs) usually boosts the dollar, as it means a healthy economy and may prompt the Federal Reserve to raise interest rates. Conversely, weak data may weaken the dollar.

Major currency pairs (such as EUR/USD and GBP/USD): under the influence of non-farm, if the dollar strengthens, currency pairs such as EUR/USD and GBP/USD will fall, while these currency pairs will rise if the dollar weakens.

2. Stock market

US stock market (such as S&P 500 index, Dow Jones Industrial Average): Strong non-farm data may indicate strong economic growth, thereby boosting the stock market. However, overly strong data may also lead to concerns about interest rate hikes, thus suppressing stock market gains. Weak data typically has a negative impact on the stock market, but it may also lead to expectations of loose monetary policies by the Fed, thus boosting the stock market in the short term.

Various global sectors: In the case of good non-farm data performance, cyclical industries (such as finance, industry) usually benefit; conversely, defensive industries (such as utilities, consumer goods) may perform flatly.

3. Bonds Market

US Treasury yields: Strong non-farm data usually leads to a rise in US Treasury yields because the market expects the Fed to prevent overheating by raising rates. Conversely, weak data may lead to a decline in US Treasury yields.

Bond prices: Bond prices move inversely to yields. When yields rise, bond prices fall, and vice versa.

4. Commodity Market

Gold: As a safe-haven asset, gold usually rises when non-farm data is weak (indicating weak economy or increased risks). In contrast, when the data is strong (indicating healthy economy and rising interest rate expectations), the gold price usually falls.

Oil: The response of oil prices to non-farm data is more complicated. Strong data may push oil prices up as economic growth usually comes with an increase in energy demand; but if strong data leads to expectations of interest rate hikes, causing the dollar to strengthen, oil prices may fall, as a strong dollar usually suppresses the prices of commodities priced in dollars.

5. Other Assets

Digital currency: The response of the digital currency market to non-farm reports is more indirect, but with the increasing participation of institutional investors, this market may begin to exhibit similar reaction patterns to traditional markets. Strong non-farm data may have a negative impact on major digital currencies such as Bitcoin, as they are usually viewed as tools for hedging against inflation or economic uncertainty.

Key considerations

Overall, non-farm reports have a wide and profound impact on various asset classes by affecting investors' expectations of economic health and Fed policies. However, given that financial markets are often pulled simultaneously by multiple long and short factors, the trend of the market is not always consistent with theory. Moreover, the initial market reaction is often very unstable as it is driven by the overall non-farm data. Minutes later, the financial market attempts to fully digest the entire non-farm report, which may sometimes lead to complex market reactions.

For example, in October 2023, the US September non-farm data far exceeded expectations and the data for the previous two months was significantly revised upwards, leading to a significant increase in investors' expectations of Fed's interest rate hikes and a market downturn in both stocks and bonds. However, the market then underwent a dramatic reversal, with US Treasury yields gradually giving back more than half of their gains, and the three major US stock indexes staging mid-day rallies, with tech stocks rising across the board.

Therefore, traders and investors should pay more attention to risk management before and after the data is released, and avoid unnecessary and unexpected losses caused by violent market fluctuations.