What are nonfarm payrolls and why do markets care?

The next nonfarm payrolls (NFP) report will be released at 8:30AM New York time tomorrow (Friday, March 4th).

Even though the Ukraine crisis right now remains a major driver of financial markets, investors and traders worldwide will still be closely monitoring this crucial piece of data out of the US economy.

What are nonfarm payrolls?

Nonfarm payrolls show how many jobs were added, or lost, in the US labor market in a particular month.

The term ‘nonfarm’ is used because the NFP excludes those working on farms due to the seasonal nature of their employment (think of the people hired only when it’s time to harvest a particular crop, but the job ends when the harvest is done).

For example, in January 2022, the nonfarm payrolls rose by 467,000, bringing the total number of people employed in the US closer to 150 million.

Why is the NFP important?

Two main reasons within today's context:

1. The NFP indicates how strong or weak the US economy is at that point in time.
    
2. The strength of the US economy then dictates how high the Fed can raise interest rates.

Keep in mind that the US is the largest economy in the world and is also the largest consumer economy, having the highest household spending in the world.

American households, on average, spend nearly 3 times more than in any other country.

Hence, more people in the US with jobs (if the NFP reflects a rise in employment) means they have more money and ability to spend on goods and services. Typically, that is a good thing for US businesses (and for their stock prices) as they can sell more of their output to customers and generate more economic activity (expand their businesses, import more raw materials, hire even more workers, etc.).

However, a stronger-than-expected NFP report these days means that interest rates could be raised higher and faster in the US. And the likes of stocks and gold don't typically enjoy the thought of higher interest rates.

What are markets expecting for the March 4th jobs report?

For the March 4th announcement, markets are forecasting that the US economy added 415,000 more jobs in February.

And it's not just the NFP that markets will be focused on the first Friday of every month.

Here are some other key data that's also released within the monthly US jobs report:

• Unemployment rate ^{(Feb forecast: 3.9%, lower than January's 4%)}
• Average hourly earnings ^{(Feb forecast: 5.8%, higher than January's 5.7%)}
• Labor force participation rate ^{(Feb forecast; 62.2%, same as January 2022)}

But these figures in and of themselves lack meaning without the accompanying context.

Markets will be interpreting the upcoming US jobs report in terms of how it could affect the Fed’s plans to raise interest rates.

READ MORE: Why are markets obsessed about the Fed?

How might the nonfarm payrolls data influence the Fed?

• A number larger than 415k should give the Federal Reserve enough confidence to raise rates more frequently this year.
   
• On the other hand, a figure that’s much lower than 415k could force the Fed to reduce the frequency and the size of rate hikes planned for this year and beyond.

When is the next Fed meeting?

We’re less than a couple of weeks away from the FOMC’s two-day meeting slated for March 15-16th. 

The Fed is widely expected to announce an interest rate hike of 25 basis points later this month, which would be the first of the several hikes slated for this year.

Markets are currently expecting a total of 5 rate hikes in 2022, at 25-basis points for each time the Fed hikes.

Although Fed officials have said that their main objective right now is to bring inflation back under control, the jobs data is also an important consideration before hiking interest rates.

READ MORE: Inflation everywhere! What does it mean for markets?

What does all this mean for the markets?

Here are some potential market outcomes for this Friday, post-NFP:

1. Higher-than-expected NFP (well above 415k) = greater chances of Fed raising interest rates higher
   
   - stocks and gold move lower
   
   - the US dollar goes higher
   
    
2. Lower-than-expected NFP (well below 415k) = Fed might have to think harder before raising interest rates
   
   - stocks and gold move higher, relieved from fears that interest rates wont rise too fast.
   
   - US dollar moderates (falls slightly) as markets lower their expectations for Fed rate hikes

Of course, the market reaction won't be based purely on the NFP data, but also on other things weighing on investors' minds this Friday, including the latest developments surrounding the Ukraine crisis.

Still, the upcoming US jobs report will be interpreted by fundamental investors and traders in trying to forecast the Fed's next move. The shifts in those forecasts then tend to move prices in the markets.

These NFP-triggered price swings may continue until markets have a pretty good idea about when the Fed will be satisfied with the level of interest rates.