NFP Quick Analysis: Goldilocks data set to weaken the US Dollar, send stocks rising
- The US economy has gained 236,000 jobs in March, a solid figure.
- Wage growth slid to 4.2% YoY, showing disinflationary pressures.
- The outcome is positive for stocks and should eventually weaken the US Dollar.
An Easter Bunny came out of the hat – the Nonfarm Payrolls is almost magical for stocks, providing all the ingredients for bulls to run once markets open. The mix of moderating job gains and slowing wage growth is a boon for companies who face a lower risk of recession and need to pay less to their workers.
Officials at the Federal Reserve are surely watching the data – holiday or not – and are smiling. These kind of figures widen the path of a"soft landing" for the economy. Inflaion is moderating according to Average Hourly Earnings, and that is the bank's focus. And while job growth could be higher, the fact it is moderating is good news means a lack of shocks to the economy. The banking crisis was enough of a shock.
For the US Dollar, it means a drop in demand. America's economy is still moving forward at a satisfactory pace to keep the world humming, allowing for riskier bets on assets overseas. But, the world's reserve currency will not suck up funds due to higher interest rates. If the Fed opts for another hike in May – a big if – the chances of a rate cut this year are rising.
For Gold, this is also a Goldilocks scenario. The precious metal needs lower US Treasury yields to rise – but also a calm mood. Recession fears limited gains in previous days, despite the crash in returns on American debt.
Nonfarm Payrolls FAQs
What are Nonfarm Payrolls?
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls' result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
How does Nonfarm Payrolls affect the US Dollar?
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls' figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
How does Nonfarm Payrolls affect Gold?
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls' figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Sometimes NonFarm Payrolls trigger an opposite reaction than what the market expects. Why is that?
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the "Great Resignation" or the Global Financial Crisis.
Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
