The US official employment report for July will be released on Friday. Jobs data is published on the first Friday of each month. The key numbers of the report are the change in employment (measured by non-farm payrolls), income data, and the unemployment rate.
It is a closely-followed report by economists and investors as it is an up-to-date indicator on one of the critical sectors of the economy, the labor market.
A few years ago, the NFP release was one of the most volatile events in the economic calendar. The minutes before and after the announcement, volatility would soar, and trading spreads too. Even a small deviation from the expected figures would result in violent price movements.
Some investors would trade the event and prepare for that, while others would close their positions hours or sometimes days before the release. Sometimes the event would turn into a “buy the news sell the fact” event when the wild reaction would trigger a response in the opposite direction that one might expect.
Month after month, this volatility was decreasing until the current levels. Nowadays, even significant deviations from expected numbers have little impact on FX. Sometimes, it turns a non-event when traders practically ignore the release.
How does NFP usually impact markets?
A strong employment gain is seen as a result of a healthy economy, which could prompt some monetary tightening from the Federal Reserve (higher interest rates) and therefore benefit the US dollar. The opposite is also true. A job loss (or small gain) could be a symptom of economic weakness and prompt some loosening (lower rates/monetary stimulus) to achieve full employment and therefore weaken the greenback.
Presently, with central banks pouring money into the system, somehow this correlation has broken or simply does not work as it used to as employment figures do not influence on policymakers as much.
A 30K deviation from the consensus number in payroll, in the old days, could trigger moves of a hundred pips in a matter of seconds in pairs like EUR/USD and USD/JPY. That is no longer the case. The last two NFP reports showed the most dramatic numbers ever, with the worst and best report on record.
The impact? Practically null. Both were largely ignored as the focus remains more on expectations and potential policy measures in extraordinary times as the world (and the global economy) enters in uncharted territory. The COVID-19 arrived in a world of negative rates and with some central banks introducing yield curve controls.
It is not only about NFP. Other employment numbers have also become “less important” in terms of expected price action volatility. On Wednesday, for example, the ADP employment figures resulted significantly below expectations. Still, the number triggered a marginal decline of the US dollar. Positive revisions to June’s data offset the below-market-consensus headline.
Revisions of previous months numbers are also another reason for the diminishing impact of economic reports, as the current data becomes unrepresentative.
That is why the Initial Jobless Claims report, released weekly, has gained attention since March. It accounts for unemployment claims from one to two weeks in the past, and they are not usually subject to substantial revisions, which makes the results more reliable.
Last week, the Bureau of Economic Analysis reported an annualized decline in Q2 GDP of 32.9%. Such a decline was not a surprise but still had no impact or whatsoever on the markets. Have financial markets become less sensitive the economic data? Considering the facts, the answer is yes. Maybe when the world economy returns to a normal trajectory, data will recover its role.
Should you trade NFP? Remember, it is not what it used to be. Intraday traders recommend not to trade these events and even to close all positions prior to the release. Closing positions now appear to be unnecessary. Still, data could surprise and trigger moves, but the extra risk factors seem to be gone.
Market consensus for Friday’s report point to a gain of 1.480 million jobs in July, an extremely large number in normal times, but might be doomed to be ignored under the COVID-19 crisis.
US President Trump said on Wednesday: “big job numbers are coming on Friday.” Maybe they bring some volatility too. A reading of around a million could be great from a political perspective, but would not surprise market participants.