Fundamental Trading Course, Chapter 2, Lesson 17C: Economic Indicators Continued

In this lesson we will go through employment data, including the very famous Non-Farm Payrolls employment data. We will also touch on the data that shows the fundamental trading position with the rest of the world.

In this Article:

• Non-Farm Payrolls
• Average Hourly Earnings
• Unemployment Rate
• Trade Balance
• Current Account

Non-Farm Payrolls (NFP)
This is one of the most famous U.S. economic figures that dominates the global FX market. If you are serious about learning economic data but don’t have a lot of time to devote then just learn this one figure inside and out. It almost always provides excellent trading opportunities and creates lots of volatility that we need to get price moving.

This figure is released the first Friday of each month. Depending on how much weight the Federal Reserve is currently placing on employment data this can be the biggest market moving data release of the entire month.

It measures the rate of employment in the U.S. economy for the largest sector of workers. Despite the name non-farm payroll, the report excludes workers from general government jobs, private household jobs, employees of non-profit organizations, and farm employees. But it does most of the jobs within the U.S. economy.

It’s important to note that NFP does not always move the market in an aggressive manner. Some months it can be an unimportant event. But when the market is focussing on NFP there is not much else that can impact the FX market more. This makes it one of the most exciting figures to trade.

Of course, this type of figure is very important for gauging the overall health of the U.S. economy and as a result can give us traders’ clues as to the next interest rate move from the Fed.

For example, if NFP has recently missed expectations many times and is falling then we can assume that the Federal Reserve will take note of this. If this trend persists over time then the Fed will very likely step in at some point and try to stimulate the jobs market. They would most likely start by lowering the interest rates which we already know will have quite and impact on the USD.

The best way to trade NFP is to first research how much importance the market is placing on it for the given month and then position yourself accordingly. Don’t worry; later on we will discuss how to position yourself and trade in and out of key risk events such as NFP.

Average Hourly Earnings
This is sometimes referred to as “Average Earnings Index” in certain countries such as the United Kingdom.

This is important because it tells you very directly which way employment earnings are heading. If earnings are going up then on average people have more disposable income which they may choose to spend within the economy. It’s a leading indicator for consumer inflation. And we know how important consumer spending is to most developed nations.

This is the change in the price that businesses have to pay for labour (employee’s average hourly wage). Employment is one of the largest costs for running a business. Of course companies want to pay less for labour because it will help them make more profit from the products that the business sells. This makes them more competitive, especially if they are exporting companies. But in the end, the Fed’s mandate is to the people and they want to see this indicator rise steadily.

Another reason that it is important is because it is the earliest inflation related data of each month. This can give us some clues as to where inflation might be heading over the short to medium-term.

In the United States this data is released at the same time as NFP and the Unemployment Rate. So sometimes this can be just as big a deal as NFP itself depending on how positive or negative the number comes out.

For example, let’s pretend that NFP comes out at 200k and was expected to come out at 200k. No deviation here to trade from and you might expect the price of the USD to go nowhere. However, the USD starts getting killed. You then notice that average hourly earnings came in at 0.0% when the expected was 0.3%. Bang! That is exactly why the USD is getting destroyed now. The market shifted its focus to average hourly earnings because there was nothing to trade from the headline NFP number.

This is a common scenario on both the positive and negative side. Sometimes trading economic data is not as simple as watching one indicator. Sometimes you need to know the relationship between other indicators as well.

You should do some research to see how much weight the Federal Reserve is giving to wage inflation data at the current time. Most of the time they consider it to be a big deal and so does the market.

Unemployment Rate
In its most basic form, the unemployment rate is basically the percentage of the total labor force that is unemployed but who are actively seeking employment and willing to work.

The unemployment rate is very often used by central banks as a short term target while they are managing monetary policy. This makes any changes in the unemployment rate will be really important to us as traders.

Unemployment occurs when a person who is actively searching for employment is unable to find meaningful work. It is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate which is the number of unemployed persons divided by the number of people in the workforce which gives you the percentage of people who are unemployed.

As I have already mentioned, employment figures not only display the overall headline but also a plethora of other data that is digested by the markets. There are many times where the other data inside each report can overtake the headline itself in importance and is worth keeping an eye out for.

A steady rise in unemployment is never good and can indicate a worsening of the economic situation for the country reporting it. This can cause consumer spending to drop which generally leads to weakness in the local currency.

Trade Balance
This measures the value of imported and exported goods and how they compare to each other for the given period of time being measured.

When imports and spending exceed exports and earnings the country is said to have a trade deficit. A trade deficit is generally considered a negative thing because it means that money is literally flowing out of the country.

When exports and earnings exceed imports and spending the country is said to have a trade surplus. A surplus is generally considered to be a positive thing for the country and particularly for its currency. The reason for all of this is due to demand. If the demand for a country’s exports is high then the exporting companies will likely make more money and add to growth in GDP which as we know is pretty important.

For example, if the UK is exporting lots of goods to foreign countries, those foreign countries will need to purchase British pounds in order to buy those products. This can obviously have a potential positive impact on the British Pound if it is done in large enough quantities.

Vice versa if UK citizens are buying most of their products from abroad then they will first need to sell their British pounds in order to buy the local currency where they are purchasing from. Again, this can cause selling pressure on the British Pound over time. This has an impact on the overall trend in currency values relative to each other.

Traders know this so when figures like trade balance show that some kind of trend is possibly forming they will immediately try and get in first causing an initial wave of movement right after the figure is released. This comes with the caveat that trade balance needs to be important to the market at the time.

Current Account
This measures all of the money coming into the country versus all of the money flowing out of the country. Basically, current account is the difference between the nation’s overall savings and its purchases/investments.

The current account is an important indicator that tells us about the health of a particular economy. It’s the sum of the balance of trade, net income from abroad, and net current transfers out of the country.

A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account indicates that it is a net borrower from the rest of the world. Said another way, a positive current account reading indicates that a lot capital is flowing into the country which could strengthen demand for the local currency and see it rise in value. This is what we care about as currency traders.

Up Next:
Next we will take a look at some of the economic data that shows how well the country is making big ticket items such as homes and automobiles.