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What does the Nonfarm Payroll report tell us?

The Nonfarm Payroll report, also known as the Employment Situation report, provides detailed information on the employment situation in the United States. This includes the number of people employed (excluding farm workers and some other U.S. workers), the unemployment rate, and wage inflation—the rate of change in wages. It is published monthly by the Bureau of Labor Statistics (BLS), usually on the morning of the first Friday.

The Nonfarm Payroll report is closely watched by investors, economists, and policymakers because it provides insight into the strength of the labor market and the overall health of the economy. A strong labor market is typically seen as a sign of a healthy economy.

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How are unemployment and inflation related?

In general, unemployment and inflation are inversely related, meaning that as one increases, the other tends to decrease.

This is because when unemployment is high, there is typically a greater supply of labor, which can put downward pressure on wages and prices, leading to lower inflation. Conversely, when unemployment is low, there is typically a lower supply of labor. Employers may have to offer higher wages to attract and retain employees. This can lead to higher levels of inflation, as the increased wages feed into higher prices for goods and services.

It's important to note, however, that this relationship is not always straightforward and can be influenced by a variety of other factors.

Source: https://www.cabotwealth.com/daily/stock-market/unemployment-stock-market-correlation-one-chart

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How does the Nonfarm Payroll report affect the stock market?

Normally speaking, a strong employment report can lead to an increase in stock prices, as investors see it as a sign of a healthy economy, and companies may have more revenue to invest in growth.

However, in times of inflation, the impact of the Nonfarm Payroll report can be mixed. The Federal Reserve may respond to a strong employment report by raising interest rates to tackle inflation and cool the economy. This may cause the stock market to go down. In contrast, when employment is low, indicating a weak labor market, the Fed may pause or slow the rate hike. This could stimulate the market and make stock prices go up.

On February 3rd, 2023, the January Nonfarm Payroll report was released with higher-than-expected payrolls and wages despite Fed’s aggressive efforts to tackle inflation.

In response, both the S&P 500 and the Nasdaq-100 index dropped by more than 1%.

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How do investors trade the Nonfarm Payroll report?

Generally speaking, investors can look at three data points, nonfarm payrolls, unemployment rate, and wage inflation. They can compare the actual release with the forecast and the previous one to see if it’s a strong movement.

In a stabilized environment

As mentioned above, a strong employment report could normally inject confidence into the stock market and raise stock prices. Investors may add growth stocks to their portfolio if a strong employment report (indicating a bull market) is released. Otherwise, they may reduce their position size or add defensive stocks if a weak report is released.

In an inflationary environment

Things could be different in a time of surging inflation. It’s possible that the stock market would not go up or even go down following a robust employment report release. If the report looks strong, investors may need to watch for a rate hike and possible decline in stock price.

This is when the market is full of uncertainty. Investors may want to make sure their investments are diversified among different sectors to spread risks in a volatile market.

Selecting sectors

The employment report could also provide insights into the future movements of different economic sectors.

For example, the November report shows that notable job gains occurred in health care. Investors may choose to invest in stocks and ETFs in the healthcare sector, expecting the price to rise.

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The Bottom Line

The Nonfarm Payroll report shows the overall state of the labor market and the economy and offers insights into the stock market. However, it’s not wise for investors to make trading decisions based entirely on the report. They should also look at other economic indicators (Click to go to the economics calendar on Webull), for example, the CPI, fundamentals, and technical indicators as well.