Why do I need to know this? I’m a technical trader!

Have you ever had one of those trading setups that boasted a staggering amount of confluence fail in dramatic fashion?

You know the kind of setup that wouldn’t look out of place as wallpaper on your mobile phone. Of course you have. We all have! One reason the area may have fell flat could have been due to a scheduled news event. Experienced traders are generally conscious of what’s ahead on the economic calendar. Newer traders, on the other hand, often unwittingly expose their positions to potentially damaging volatility around news time.

So with that being said, although you may trade using only technical analysis, knowing what news lies ahead is crucial. And in terms of economic indicators, there’s little that comes close to the mighty US employment report!

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Key elements of the report

The Bureau of Labour Statistics (BLS) presents its findings at 08.30am EST, generally on the first Friday of the month using two major surveys: the household survey and establishment survey.

Both surveys are required for a complete picture of the labour market.

  • The payroll survey (CES) is designed to measure employment, hours, and earnings in the non-farm sector, with industry and geographic detail. The survey is best known for providing a highly reliable gauge of monthly change in non-farm payroll employment. A representative sample of businesses in the US provides the data for the payroll survey.
  • The household survey (CPS) is designed to measure the labour force status of the civilian non-institutional population with demographic detail. The national unemployment rate is the best-known statistic produced from the household survey. The survey also provides a measure of employed people, one that includes agricultural workers and the self employed. A representative sample of US households provides the information for the household survey.

Source: Bureau of Labor Statistics

The household survey gathers its data by contacting 60,000 homes concerning employment. The response is usually high. The payroll survey, however, collects its information on the job market from approximately 400,000 businesses. Only 60-70% of the responses make it back in time for the first scheduled release. As more replies filter through, this forms the basis for subsequent revisions.

Over the long run, both surveys tend to move in tandem.

The economic statistic that generates the most excitement within this report is the monthly change in non-farm employment. Other figures that warrant close attention are the unemployment rate, average hourly earnings and participation rate (commonly known as labour-force participation rate).

  • Non-farm Payrolls measures the change in the number of people employed during the previous month, excluding the farming industry.
  • The unemployment rate gauges the total percentage of workers that are unemployed and actively seeking employment during the previous month.
  • Average hourly earnings is the percentage change businesses pay for labour (this excludes the farming sector).
  • The participation rate informs investors what proportion of the work force are employed or ready and able to work.

Typically, you’ll see the USD jolt higher on better-than-expected numbers, and trade lower on the back of a less-than-stellar read. Other times, limited movement is experienced as the numbers come in as forecasted.

However, traders’ reactions to the report can, and often do, diverge. For example, there are times when the focus is on wage growth as this is the earliest monthly data released in relation to labour inflation. When businesses pay more for labour (a firms biggest expenditure), the higher costs are usually passed on to the consumer.

Trading the release

There’s no ‘right way’ to trade the US employment report as the move is dependent on several themes: market expectations, sentiment and the current focus of the central back, to name but a few.

Here are a few aspects to keep an eye on should you engage with the release:

  • The US ADP non-farm employment change. This data provides an early look at employment growth, and is considered to be a precursor to Friday’s BLS (Bureau of Labour Statistics) non-farm employment change as it’s released two days before.
  • Leading up to the release is when the market’s uncertainty is at its highest. Traders have no credible data to work with, other than forecasts. As such, executing trades during this time carries additional risk.
  • Another point worth mentioning is that should the release show a higher reading vs. its previous value, but comes in lower than forecasted, the USD can still make a move to the upside, due to the indicator improving in actual numbers.
  • Also, do remember that the non-farm payrolls report and its associated readings are considered short-term market movers. The USD often reacts immediately and generally tends to fade once the excitement diminishes.

There are a several technical trading strategies littered across the internet educating those wishing to trade the report on release. As long as you remain cognizant of the potential risk of loss, it could be a profitable endeavour. Conservative technicians, however, often wait for the dust to settle before engaging. What we mean by this is they simply take advantage of any follow-through momentum 5-10 minutes after the release.

Final words

The US employment situation report is extremely rich in detail, and would be beyond the scope of this article to demonstrate its vast expanse. But what we’ve hopefully achieved here in this short piece is highlighting some important factors to be aware of on release day!

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