Labor market conditions are very important for understanding economic development. That's why the monthly nonfarm payroll report significantly impacts the forex markets. Investors and traders always watch indicators to determine economic growth trends. The nonfarm payrolls report is the main indicator that shows the unemployment rate and labor market conditions. Also, it should be noted that the labor market is a key parameter for regulating the Fed's monetary policy. Wage growth and unemployment data, included in the monthly employment report, will also help shape inflation expectations.
The Bureau of Labor Statistics publishes its monthly employment report on the first Friday of a new month (with some exceptions due to holidays). This report covers the employment statistics of the previous month.
How to analyze labor market statistics? If the number of nonfarm jobs is increasing, that indicates that the economy is growing and in good shape. But too rapid an increase is undesirable because if the rest of the economy (business activity, industrial production levels, personal consumption expenditures, etc.) is slowing, it can lead to accelerated inflation. At the moment, there are conditions in the US where most economic indicators are beginning to signal a slowing economy (recession) while the labor market remains strong and is a pillar of the economy. On the one hand, it is good because it prevents the economy from falling into recession, but on the other hand, the inflation rate (consumer and producer prices) is rising, which in turn negatively affects other indicators. This is a vicious circle from which it will be extremely difficult for the Fed to exit without a recession in the economy. That's why the labor market must grow along with other indicators.
How to read the nonfarm payroll data?
As with many other economic indicators, the difference between the actual nonfarm data and the numbers expected by economists will often determine the overall impact on the market. For example, suppose nonfarm payroll numbers growth is below economists' estimates. In that case, forex traders may be motivated to sell dollars in anticipation of a weaker currency amid fears that economic growth is not as robust as previously thought. Conversely, a strong report may motivate investors to buy US dollars on expectations of better US economic growth or tighter monetary policy if other indicators do not show growth and inflation is rising, which is happening now.
Let's look at a concrete example. Last Friday, June 6, the latest nonfarm report was released. The data was better than expected. The fact was 390k with an expectation of 325k. The dollar index strengthened during the news release, with Friday and Monday also indicating dollar strength. This happened because the labor market remains strong despite declining other indicators and record inflation. And this is a sign that the Fed will tighten monetary policy in order to prevent further unwinding of inflation. But in the end, it will cause some slowdown in the labor market, but lower inflation will positively affect business activity and industry.