AT 1.30pm on the first Friday of every month a quiet hush descends of the City, as financiers, traders and analysts await US non farm payrolls data (NFP). This single piece of data, which measures the number of jobs created by the economy each month, is regarded as the most important economic indicator in the US.
Because financial markets across the world are focussed on this figure, NFP can be the cause of much turbulence in the markets. This can offer a good opportunity for spread betters.
While it’s not possible to trade on the NFP number itself, equity markets, US bond markets and the dollar can be a good proxy to get exposure to either strength or weakness in the number.
Data for February is released this Friday, and currently analysts expect the economy to have created 25,000 jobs.
Michael Hewson, markets analyst at CMC Markets, says that in the immediate aftermath of the jobs data the market can either move sharply higher or lower, depending on whether it has come in above or below expectations. It can be safer for spread betters to wait for the markets to settle down before placing a trade, and fully digest what the number means for the US economy.
The dollar can be particularly choppy around the release of payrolls data, says Manoj Ladwa, senior trader at ETX Capital: “Depending on what figure is expected, you tend to see the dollar move against other major currencies in the direction of the anticipated number before it is released.”
It’s wise to give yourself a wide stop loss if you trade this data, to ensure that bouts of volatility don’t catch you out.
Ladwa says that stocks and stock indices are also worth trading, but sometimes they can move in the opposite direction of what you would expect. Although the data might show that the economy created jobs, stock markets can actually fall. This is because stock markets are a discounting mechanism, notes Ladwa, and a strong economy that can create jobs indicates that interest rates might have to rise, which is bad news for equities.
CMC Markets’ Hewson says that expectations are high for the labour market to pick up after a spate of stronger economic data in recent weeks: “We’ve seen strong GDP figures for the fourth quarter of last year and strong business investment and yet the labour market data has continued to be disappointing.” There are signs that NFP could continue to disappoint last month. Initial jobless claims, which measure the number of people collecting unemployment benefits on a weekly basis, trended higher in the second half of February.
The Dow Jones Industrial Average has traded within a 300-point range in the last three weeks, due to the mixed signals coming from economic data, Hewson says. For example, fourth quarter GDP was strong, yet retail sales have been weak. Due to the cloudy economic outlook, if the NFP data is weak, then “markets could drift lower from here,” says Hewson.
Spread betters who want exposure to markets in the aftermath of NFP data should do so on a short-term basis. Although you could be in for a rocky ride, there are profits to be made.