US non-farm payrolls have become one of the most eagerly awaited economic data announcements for traders every month as they look to the figures as a key indicator of the strength of the nation’s economic recovery.
Nicknamed “non-farm Friday” by traders, due to the fact the US Bureau of Labor Statistics publishes the data on the first Friday of each month, the minutes and hours after the data are published are now among the busiest trading times for spread betting providers.
The monthly data has the ability to generate thousands of transactions in the minute following the announcement, with one UK spread betting firm receiving 5,000 buy and sell orders – a rate of 83 trades a second.
“Non-farm payrolls really is one of the standout pieces of data that traders look for every month,” says Joshua Raymond, chief market strategist at City Index. “We see huge amounts of trading activity in the immediate aftermath of a non-farms payrolls figures.”
However, analysts say the figures, which show the unemployment rate and job growth in the US, have not always been the highlight of professional trading calendars.
“Non-farm payroll has been particularly important since the global economy hit the wall as employment data are seen as one of the most direct indicators of economic growth,” explains Simon Brown, managing director of ProSpreads, the spread betting provider.
Mr Raymond agrees. “It is an important piece of economic data that helps investors to better grasp both the strength of the US economic recovery and future Fed monetary policy.”
David Jones, chief market strategist at IG Index, says the “traditional” big events that traders used to watch out for on a monthly basis are interest rate decisions, but these are having a muted impact at the moment as central banks are keeping base rates on hold.
“Currently the interest rate cycle is in the ‘dip’, so neither increasing or decreasing, but when that changes, it is likely that economic indicators that directly influence interest rates will be more prevalent in trader’s minds,” adds Mr Brown.
Analysts agree traders and spread betters are attracted by the volatility that the release of the latest non-farm payroll figures creates in the markets.
Non-farm payrolls can trigger a volatile market reaction, with 1 per cent moves in indices such as the FTSE 100 or currencies, or even bigger moves in individual stocks.
Professional traders “love” non-farm Friday because it creates volatility, which in turn presents opportunities, says Mr Brown. “You can almost smell the anticipation of traders as they wait for the number to appear on their screens. They will be poised to act immediately when the number is released and will capitalise on the volatility by ‘jumping on to’ moves, whatever the direction, on the belief that the move will continue.”
Analysts say the trading volumes are closely related to how the payroll figures appear in relation to consensus expectations. “The bigger the miss, regardless of whether its positive or negative, the bigger the increase in trading volumes we would typically see in the immediate time frame after the data are released,” explains Mr Raymond.
The figures have not been agreeing with the consensus view recently, so trading volumes have increased in the past few months. Michael Hewson, market analyst at CMC Markets, says he has seen a significant uptick in activity recently as traders look to take advantage of the opportunities that come with a number that catches analysts “on the hop”.
The most popular trades tend to be on foreign exchange, with investors focusing on the major currency pairs such as the euro and the pound against the dollar.
“GBP/USD can be particularly popular due to the strength of the UK compared to the rest of Europe (against the US dollar) and because it typically results in a greater point movement, which for traders results in a greater profit or loss,” explains Craig Inglis of CMC Markets.
But experts warn that traders need to be cautious when attempting to trade around these figures. According to Mr Jones, traders should be aware of the excessive volatility that can be seen immediately after announcement as the market can switch from being positive to negative, or vice versa, very quickly.
“It can often be a calmer approach to give sentiment half an hour or so to settle down following the announcement to see if an identifiable trend emerges,” explains Mr Jones.
Most traders will, as a result, use a stop loss for their trade. Mr Raymond recommends using a guaranteed stop loss as opposed to a standard stop loss for added protection. “A guaranteed stop loss guarantees to close your trade at the stop loss level specified, regardless of any market gapping, whilst a standard stop loss does not, and closes the trade at the first tradable price.”
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