How does nonfarm payroll impact the global market?

In early August 2024, a dramatic stock market crash erupted in the U.S., sending shockwaves through global markets. In this article, you'll learn the mechanics behind the turmoil, and interpret an important piece of employment data: the nonfarm payrolls (NFP).Thus, you’ll be notified as soon as the data is released.

It all started on Friday, August 2nd, at 8:30 AM, when the U.S. Labor Department released surprising nonfarm payroll data. Immediately, U.S. stock futures dropped, and by the end of the day, the three major indices had declined sharply.

After a weekend of uncertainty, concerns spread to global markets. On Monday, August 5th, the Asia-Pacific markets opened in the red.

The Nikkei 225 experienced its largest single-day drop ever, while the Korean KOSPI faced its biggest decline since 2008. In Europe, major indices in the UK, France, and Germany also saw significant losses.

When U.S. markets opened, Nvidia, the AI leader, plummeted nearly 15%, and the Nasdaq dropped over 1,000 points. Traders exclaimed, 'There are falling knives everywhere!'

So, what’s the deal with these nonfarm numbers? Unlike GDP or CPI, nonfarm payrolls may not come up in everyday conversation, but they are one of the key economic indicators. It measures month-to-month changes in employment, showing how many more or fewer jobs there are compared to the previous month.

As the name suggests, nonfarm payrolls exclude certain industries, such as farm workers, domestic staff (like nannies and housekeepers), and some nonprofit organizations.

Why are these jobs left out?

Agricultural employment tends to fluctuate with seasonal changes, complicating our understanding of trends in other sectors.

Meanwhile, domestic workers and nonprofits are generally less influenced by economic cycles, which could introduce unnecessary noise into the data.

By excluding these categories, nonfarm payrolls focus on the core of business and industrial activity, keeping the data clearer and more precise.

Changes in nonfarm payrolls are closely related to economic conditions. And the Federal Reserve closely monitors this key indicator.

Given the U.S. economy's global role, nonfarm data doesn’t just affect U.S. markets; it can potentially have an impact worldwide, influencing other countries' monetary policies and capital flows.

Before the release, analysts usually provide forecasts, and the market often uses the median of these as a consensus.

When the data comes out, it’s compared to these expectations to see if it beats, meets, or misses the mark.

It is important to note that the Department of Labor also revises the data 1-2 months after it is released.

This is mainly due to technical issues such as delayed questionnaires and seasonal adjustments. They usually do not affect the market too much due to the long intervals between them. However, if the deviation is too large, it might cause concern in the market.

Now, let’s dive into how nonfarm payroll numbers can shake up the markets. Nonfarm payrolls act as a starting gun for the market. Many investors rely on this data to gauge economic health and adjust their strategies.

These figures are released at 8:30 AM ET on the first Friday of each month unless there’s a holiday, in which case the release is pushed back a week.

Let’s go back to August 2nd. The nonfarm payroll data released that morning fell far short of expectations. Wall Street anticipated 175,000 new jobs, but only 114,000 were added. This disappointment sent shockwaves through the market.

The disappointing numbers sparked a weekend of worry.

Investors questioned the future of the U.S. economy. It felt like a financial crisis was just around the corner.

Just days earlier, the Federal Reserve had decided not to lower interest rates, thinking the U.S. economy was still strong. What a quick turnaround!

The VIX, the market’s "fear index", surged, reaching levels not seen since the early days of COVID-19.

Now you may probably think that nonfarm payrolls and the stock market are proportional. Namely, if data falls short of expectations, markets tend to decline; conversely, when data exceeds expectations, markets typically rally.

However, the real relationship between non-farms and the market is not straightforward.

Sometimes, strong numbers may also cause investor concerns. For example, on October 7th, 2022, the market expected 250,000 new jobs, but the actual figure was 263,000. The S&P 500 dropped nearly 3% that day.

Why did this happen?

The relationship between nonfarm payrolls and stock performance is not linear. A strong job market, for example, is generally regarded as good news.

However, when the central bank tightens its monetary policy to combat inflation, solid employment data may raise fears of more aggressive rate hikes, which can hurt stock performance, as seen in 2022.

In parallel, weak job market data generally causes the central bank to loosen the money supply, which may drive the market up. But if economic recession is expected, disappointing nonfarm data can heighten investors' fears, which might lead to sharp market declines, like the case in early August 2024.

After the August storm, subsequent data releases were better than expected, allowing the market to recover and reach new highs.

Understanding the economic cycle is crucial—it's not just about numbers but their context.

In our following courses, we'll unpack the different stages of a typical economic cycle. So, stay tuned!

You can easily find the nonfarm payroll information on the moomoo App.

Go to Markets and swipe up to the Economic Calendar. Here you can see all upcoming economic data releases.

You can also click the calendar at the top of the page to switch date, month, and year.

When you click on a specific economic release, like "US Nonfarm Payrolls," you’ll find the upcoming release date, historical trends, and past data.

Don't be worried about missing important release times. You just need to click the calendar icon to subscribe.