NFP (Non-Farm Payrolls) Trading Strategy (Backtest & Rules)
NFP reports are known to induce volatility in the financial markets, as well as set the tone for price movements each month. So, it is in your interest as a trader to know how to read the NFP report and have a reliable NFP trading strategy. How do you trade the NFP (non-Farm Payrolls) numbers)?
The NFP (Non-Farm Payrolls) trading strategy is based on the report released every month by the US Department of Labor, which presents the number of new jobs created during the previous month, in all non-agricultural businesses, within the United States. Published every first Friday of each month, at 8.30 am Eastern time, the report primarily discloses the increase or decrease in jobs in the United States compared to the preceding month. It is an essential indicator of the current state of the US economy.
In this post, we take a look at the Non-Farm Payroll Report trading strategy. At the end of the article, we provide a backtest of the strategy.
Related reading: – Many other macro trading strategies (hundreds)
What is NFP?
The Non-Farm Payrolls (NFP) is a report released every month by the US Department of Labor, which presents the number of new jobs created during the previous month, in all non-agricultural businesses, within the United States. The report primarily discloses the increase or decrease in jobs in the United States compared to the preceding month and it is an essential indicator of the current state of the US economy.
NFP is usually released on the first Friday of every month at 8.30 am Eastern time. The report includes the number of non-agricultural jobs added to the US economy over the month, excluding private household employees, employees of the federal government, farm employees, and employees of nonprofit organizations. In essence, the NFP is a key economic indicator of the US employment market.
Because the NFP report consistently causes one of the largest rate movements of any data release in the financial markets, every first Friday of the month is a unique day for traders, as volatility is usually dried up until the NFP data is released and what follows is a period of huge price swings. Given the effects of the data on market movements, many analysts, traders, funds, investors, and speculators anticipate the NFP report and the impact that it will have on the markets.
Although the NFP report is more intensely followed by forex traders (both fundamental analysis and technical analysis traders), the data affects all financial markets in the US, as it is an essential pointer of the current economic state.
Due to its high correlation with economic policy decisions made by the US Federal Reserve Bank, the payrolls figure can change significantly month on month, and such changes tend to trigger volatility in the markets. Generally speaking, a high reading is seen as positive for the US economy, while a low reading is seen as negative.
Non-Farm Payroll Trading Strategy video
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Why is the NFP report important?
This is a no-brainer: the US is the biggest economy in the world, and the NFP report gives invaluable insight into the current state of that economy. Essentially, the report shows how US businesses are performing, which can give an indication of where the Federal Reserve might take interest rates in the near future.
Since it is an indicator of the health of the economy as a whole, which is part of the Federal Reserve’s mandate, the FOMC (Federal Open Market Committee, a committee within the Federal Reserve System charged under United States law with overseeing the nation’s open market operations) pays attention to the NFP figures when deciding whether to raise or lower rates.
For instance, the FOMC may see a high number of jobs as a sign of inflationary pressures and consider an interest rate hike. Likewise, it may see a fall in the number as a sign of declining economy and consider a rate cut. Given this relationship between the NFP report and interest rates, there is no wonder it is followed by traders in various financial markets.
Non-farm payrolls components
Although the NFP data gets the headlines, the report has many other components that can be just as important to follow. These are the other essential components of the NFP report:
- The unemployment rate as a percentage of the overall workforce
- The sectors where the increases and decreases in jobs came from
- Average hourly earnings — this shows whether workers’ wages are increasing or decreasing
- Revisions to previous non-farm payroll releases
Non-farm payrolls calendar
The NFP calendar is the scheduled date for the release of the Non-Farm Payroll data. As we stated earlier, the NFP data is released every first Friday of each month at 8:30 am Eastern Time (1:30 pm GMT). So, the NFP calendar has the dates of the first Friday of each month and the time. Attached below is a table showing the NFP calendar.
| NFP Month | NFP Day | Time EDT |
| January 2024. | 5. | 8:30 AM |
| February 2024. | 2. | 8:30 AM |
| March 2024. | 8. | 8:30 AM |
| April 2024. | 5. | 8:30 AM |
| May 2024. | 3. | 8:30 AM |
| June 2024. | 7. | 8:30 AM |
| July 2024. | 5. | 8:30 AM |
| August 2024. | 2. | 8:30 AM |
| September 2024. | 6. | 8:30 AM |
| October 2024. | 4. | 8:30 AM |
| November 2024. | 1. | 8:30 AM |
| December 2024. | 6. | 8:30 AM |
When is the next non-farm payroll report?
Typically, the next non-farm payroll report is released on the first Friday of each month to show the total monthly increase or decrease in paid U.S. workers across non-farm businesses for the preceding month.
The report is published by the US Bureau of Labor Statistics, an agency of the country’s Department of Labor that is responsible for measuring labor market activity, working conditions, and price changes in the economy.
The main mission of this agency is to create and organize timely, needed government information and services and make them accessible anytime, anywhere, via different channels.
Apart from the monthly NFP reports, the Bureau of Labor Statistics is also responsible for releasing the US Consumer Price Index (CPI), which is used to measure inflation. These two elements — employment and inflation — are the key factors on which the US Federal Reserve bases its monetary policy decisions.
What does the NFP report tell you?
Traders have different ways of analyzing the NFP data.
Generally, a higher payroll figure is good for the U.S. economy, as it shows that more jobs are added and the economy is growing.
On the other hand, a lower employment picture is negative for the US economy. Traders and investors look for higher values and compare with the previous month and the experts’ consensus for the expected value.
Most times, what moves the markets is whether the reported figure beats the expected value or not. When the reported data is higher than the expected value, traders see it as a good sign and get bullish on the USD and the US economy in general.
During periods of rising inflation, if the data beat the expected by a high margin, investors may become concerned about inflation.
On the other hand, when the reported value is lower than expected, traders see it as a negative sign for the USD and the US economy and get bearish. If, however, the reported value is almost the same as the expected value, the market gets a mixed reaction, as traders anticipating a change in the NFP report will turn to other subcomponents and items to gain some sort of direction or insight.
Which markets are most affected by NFP?
The NFP report affects all markets, but the bond market is the most important since it indirectly sets the price of the other markets — stocks, forex, and commodities.
Effects on the bond market
Of all the economic reports released each month, the NFP report has the largest impact on the bond market, and here is why:
The NFP report provides the current data for all aspects of the job market, including the unemployment rate, the absolute number of jobs added or lost, total hours worked, average hourly wages, and how the jobs picture for various sectors, such as government, restaurants, or manufacturing, has fared.
Since the job market is the heartbeat of the economy and an engine of growth, the NFP report sets the tone for the financial markets, especially the bond market. It’s an indicator of economic health, and a strong economy prompts companies to hire more workers.
Higher employment means more dollars to spend on goods and services. Without improvement in employment, there would be no economic growth. This is why investors take a positive NFP report as a sign that economic growth is on track.
Generally, higher values in NFP reports tend to depress bond prices. The reason is that the Federal Reserve (the Fed) is more likely to raise interest rates in the future if the job market is strong, and since the Fed Funds Rate heavily affects the yields on short-term bonds, the prospect of an interest rate hike causes yields to rise.
When bond yield rises, prices fall. This is true for Treasuries, as well as other rate-sensitive segments of the market such as municipal bonds, mortgage-backed securities, and higher-quality corporate bonds.
Furthermore, stronger job growth raises the likelihood of inflation, which increases the chances of an interest rate hike. Also, higher inflation eats away at bond prices, so the prospect of rising price pressures is often negative for bonds. The explanation is not that simple, as the link between growth and inflation is complex. But at the basic level, high job growth causes a decline in bond prices.
On the flip side, a negative job report (NFP data below the expected) tends to be positive for the bond market for the opposite reasons of those just mentioned. The Fed would be more likely to cut rates than to increase them, and secondly, the odds of inflation would be lower — both are positive for the performance of U.S. Treasuries and other rate-sensitive investments.
Effects on the equity market
NFP is a key indicator of the US economic health, and the state of the economy is one of the major factors that move the stock market. When the economy is growing, investors are bullish on the stock market, and when the economy is in a decline, investors are bearish.
As an economic indicator, the NFP is monitored by stock traders to know how to trade. When the NFP figures are positive or exceed the market expectations, traders and investors have positive sentiments about the US stock market. As a result, stock traders will be more inclined to invest in US stocks, ETFs, and index funds, such as the ones that track the Dow 30, NASDAQ 100, and S&P 500.
On the other hand, when NFP figures fail to meet the market expectation, traders see it as bad news for the US stock market and lose faith in the market. This translates to less optimism and reduced investing activities.
Effects on the forex market
The Nonfarm Payrolls report is even more famous among forex traders, as it has huge effects on USD-containing currency pairs.
In fact, it is considered the most important economic indicator for forex traders. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. The volatility attached to the report is due to its high relation with economic policy decisions made by the Fed.
Generally speaking, a high reading (or rather, the actual figures beating the consensus) is seen as positive for the USD, so forex traders get bullish on the USD. This means going long on currency pairs that have the USD as the base currency, such as the USD/JPY, USD/CAD, and USD/CHF, and shorting currency pairs that have the USD as the quote currency, such as the EUR/USD, GBP/USD, and AUD/USD.
On the other hand, a low reading (or the actual figures being below the consensus) is seen as negative for the USD, so traders get bearish on the USD and trade accordingly.
While the unemployment figures get the headlines, the previous months’ reviews ​and the hourly earnings are as relevant as the headline figure, and thus, the market’s reaction depends on how the market assets them all. The number is also subject to strong reviews in the upcoming months, and those reviews also tend to trigger volatility in the forex board.
Effects on the commodity markets
Given its effect on the US economic strength and the value of the USD, the NFP report also affects the gold spot prices and gold futures, as well as the demand for oil, gas, and energy.
- Gold: The NFP effect on the price of gold stems from its impact on the dollar. A high NFP could lead to a decline in gold prices.
- Oil: A positive report implies high energy use in homes, transportation, and industries. However, the relationship is a bit complex.
How to trade NFP – NFP (Non-Farm Payrolls) trading strategy backtest
Let’s look at the performance of stocks and bonds on the day the report is published.
NFP (Non-Farm Payrolls) trading strategy backtest 1
Let’s backtest to find out the stock market returns on that particular day. We use the following trading rules and settings:
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Let’s backtest on SPY, the ETF that tracks S&P 500, since its inception in 1993:
The average gain from the open to the close is 0.09%. This is significant because, on any random day, the return is zero. Thus, the NFP numbers have made stocks react positively over the last decades years.
What about bonds? Let’s look at the equity curve and statistics when we backtest TLT since its inception:
The average return is a negative 0.02%.
NFP (Non-Farm Payrolls) trading strategy backtest 2
Let’s do some backtests to see what happens in the 1-5 trading days after the report is released:
- We buy at the close on the day of the report.
- We sell at the close N-days later.
The backtest on SPY returned the following performance metrics:
The first column shows when we exit: row number 5 means we exit five days later and the average gain is -0.04%. Every result is lower than any random day for the first 6 days, but this might also coincide with the weak seasonality after the first three trading days of a new month.
How do bonds perform? Let’s look at TLT:
Bonds perform poorly, thus also (perhaps) explaining the weak performance in stocks (when bonds fall, interest rates go up).
How to trade NFP? Conclusion
Our backtests reveal that it’s hard to conclude how to trade the NFP numbers. NFP trading strategies are based on more or less on random numbers that are hard to predict.
As a rule of thumb, we have never found any edge in trading on macro numbers.
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