Recent research has found that US data releases on non-farm payrolls, the unemployment rate, initial unemployment claims, GDP and consumer sentiment tend to account for the largest moves in both US and British Markets. The US non-farm payrolls figure in particular is one of the most important scheduled economic announcements for stock markets around the world and it is known to heavily impact the dollar, bond and equity markets. The nonfarm payroll report (NFP) includes the total number of paid workers in the US, less farm workers because of their seasonality, and excluding government employees, employees of nonprofit organizations and private household employees. It's basically a measure of productive workers and is often regarded as a key gauge of the economic health in the USA, no offence intended to those who work for government!
USA economic data is regularly released at 1.30pm GMT and one of these is the US non-farm payroll employment figure which is released on the first Friday of the month. The figure basically indicates the number of jobs lost or added to the USA economy. Why is this figure so significant? As labour is so important for the USA economy, unemployment levels play a key role in quantifying the strength of recovery – and can act as leading indicators of moves in interest rates, bond yields and the USA dollar. Most companies may be listed in London but FTSE 100 companies derive much of their earnings from the US. This is particularly true for the pharmaceutical, telecom and banking companies that dominate the index. Therefore it should come as no surprise that the state of the US economy can move markets in the UK. One of the key indicators of the US economy is the non-farm payroll employment figure, which is announced on the first Friday of each month. Because it is issued promptly at 8:30 AM Eastern standard Time, the figure comes out when markets are open on both sides of the Atlantic, which ensures plenty of interest.
We can take as an example an extract from Shares Magazine; The impact on the FTSE 100 was clear from the release of the February figure on 10 March. In February non-farm payroll employment grew by 243,000 which, according to reports, was above market expectations. The FTSE 100 was weak on the day but put on 60 points between 1.30pm and 4.30pm. The effect is less pronounced for the FTSE 250 and FTSE Small Cap indices, where constituents are much more skewed to the UK economy.
Now it's true that this report is mostly traded on the Forex market, because it reflects the economic health of the US as a whole. This is another place where trading contracts for difference is an advantage over other types of trading. As CFDs are available for almost any type of financial instrument, you can trade on currency changes with them, and are not restricted to profiting from share price movements.
Whichever way you choose to trade the Non-Farm Payroll Numbers report, you need to watch out in the moments following its release as market participants tend to rush to close out or open positions once the number is made public. Also, do keep in mind that expectations may already be priced in the markets so mild positive figures might not have the desired effect and may actually result in the market going lower. The spikes in volume tend to come just after the figures, particularly if they are some distance away from expectations. For instance, one UK CFD and spread trading company experiences around 5,000 buy and sell orders in the span of one minute – a rate of 83 trades a second during this period.
Currency rates and CFD trades on them as usually the quickest to react to those numbers. If you are adventurous in your trading, then you may want to speculate on currency movements, especially the GBP/USD and EUR/USD forex rates but you should be warned to expect a large amount of volatility, which can go against you as well as for you. If trading currency pairs, a less risky course is to wait for the initial volatility to finish, and then look for the direction that the market wants to go.
One way to do this is to wait for an inside bar on the chart, that is a bar that has a lower high than the previous one, and a higher low. This shows that the volatility is lessening. You can set up your orders to be placed in the direction of the next breakout, defining the breakout as trading higher than the bars high, or lower than the bars low, or maybe a few points further outside. If you wait for this, you are more likely to capture a rational move caused by the figures, rather than trying to anticipate and be frustrated by irrational moves.
Trading the news can be exciting, and is also one of the higher risk strategies available to you. If you place conditional entries either side of the market, you may find that both of these are triggered by the fluctuations. Your stop loss order may be rendered less effective at cutting your losses by the market gapping in response to news. These are factors you need to take into account when you consider if you have the disposition to trade the news. News is temporary in its effect, and markets soon settle back to near their previous positions. Without doubt, there are tremendous opportunities for traders who watch the news, and particularly the NFP report, but such fast action is not for the fainthearted.