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What is non-farm payroll?

what is non-farm payroll

what is non-farm payroll

Non-farm payroll is only one component of the unemployment report and monthly job growth, excluding the agricultural sector. Non-farm is a paycheck. Based on the number of checks added, general labor market is assessed in the United States. Agriculture is a subsidized sector in the United States, so employment in this sector is excluded from the report.

Impact on interest rate

As you know, for the US Federal Reserve (FOMC), there are two most important macroeconomic indicators – inflation and unemployment. Since other economic reports, as a rule, are less volatile and more predictable than NFPs, it is job growth that can be crucial in deciding on interest rates. The Fed may go for a significant rate cut in the event of a weak labor market in the United States, even if all other economic indicators do not require such measures.

As long as the US economy is a global leader, and the country’s currency is the global reserve, the Fed’s interest rates will significantly affect the entire financial world. Interest rates is a whole snowball that determines interest on loans for developing countries, the attractiveness of the US Dollar for financial flows to earn on the difference in interest rates (carry trade), the cost of credit resources for local companies and global corporations, the reserve currency rate, liquidity level assets, the cost of gold …

As a result, a sharp change in interest rates significantly affects the overall profitability of companies in the United States, that are part of stock indices. That is why trading on non-farm is so different from all other macroeconomic reports that come out daily and weekly in the market.

To understand the big picture, you need to consider the remaining components of the unemployment report.

Components of Non-Farm Payroll report

Here is a list of all the components of the US monthly unemployment report:

  • Change in the total number of non-farm payrolls in the country per month
  • Non-farm payrolls by sector: Private, State and Industrial
  • Increase or decrease in average hourly earnings (Average Hourly Earnings) as a percentage in relation to the previous month
  • Increase or decrease in average hourly earnings (Average Hourly Earnings) as a percentage compared to the same month last year
  • The average number of working hours per week
  • Participation rate (percentage)
  • The total percentage of unemployment in the country
  • Revised (adjusted) indicators for the last month

Typically, traders look only at the top of the report. But after the first few minutes of euphoria or disappointment, traders cool down from emotions and begin to analyze the components of the report.

Conclusion

An understanding comes that everything is not as rosy (or sad) as it might seem at first glance. It is at this moment that a sharp reversal of the movement of quotes can occur. Everything that grew before this begins to fall, and vice versa. Those traders who do not understand the essence of what is happening, think that this is a gift from the market, and continue to open positions in the initial direction. As a result, they fall into a trap, which can be very expensive. We also emphasize that trading on non-farm news may turn out to be excessively profitable, but it can also bring a margin call to your trading account.

 

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