Non Farm Employment, taking place today at 1:30pm BST, has the capacity to cause massive volatility in financial markets. Given there are three separate and important metrics, there can often be moves in both directions if one figure comes out better while another figure worse.
Non Farm Employment Change:
Average Hourly Earnings:
This data release shows three key employment metrics. Non Farm Employment Change, also known as Non-Farm Payrolls, measures the change in the number of employed people during the previous month, excluding the farming industry. This is vital economic data released shortly after the month ends. The combination of importance and earliness makes for hefty market impacts. Job creation is a leading indicator of consumer spending which accounts for a majority of overall economic activity. The Unemployment Rate measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month. Although it’s generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour-market conditions. Unemployment is also a major consideration for those steering the country’s monetary policy. Average Hourly Earnings measures the change in the price businesses pay for labour, excluding the farming industry. This is a leading indicator of consumer inflation because when businesses pay more for labor the higher costs are usually passed on to the consumer.
The majority of Fed members are adamant about a raising rates this year, in either October or December, with the market leaning heavily towards the latter. To inform their decision, the Fed are mainly concerned with inflation metrics, as the employment situation has already met their criteria for the first rate hike. There was over 200,000 jobs added every month this year except March and August and the Unemployment Rate has ticked down to 5.1% – the lowest level since 2008. Therefore, a move higher or lower in employment for single month will not greatly impact the Fed’s decision to raise rates. The weakest link remains inflation and unless a sustained downtrend emerges in the employment situation, the Fed will not be viewing jobs numbers as closely as they did earlier in 2015. Nevertheless, an extremely poor reading will be a concern for the Fed and may see rate hike expectations pushed back. Conversely, a surprise uptick in Average Earnings will indicate inflation should increase and will help the Fed’s confidence about the inflation situation.
Expected Market Reaction:
We will be looking for matching deviations across all three metrics in order to prompt a trade on the USD. If there is positive deviations on all three then we will look to buy the USD and if there are negative deviations across all three then we will look to sell USD. The speed with which a trade is entered can impact the overall outcome greatly since the market can move very fast on this release. Essentially, the numbers should be interpreted before entering a trade and only if there are convincing deviations should a trade be entered. The medium term bias is to the upside for the USD, so USD weakness may be faded if there is only a marginal miss on the figures.
P.S. I did also cover this release in my weekly Forex events overview. You can watch it here.
Source:: Non Farm Employment 2nd of October