Why does non-farm payrolls affect the market?

The non-farm payrolls report, which is part of the monthly employment data released by the U.S. Department of Labor, is considered one of the most important economic data points released during the month. Changes in job growth not only affect the direction of multiple markets, but may also change sentiment and investors' perceptions of economic growth. The question is why would a lagging indicator have such a big impact on financial marekt?

Nonfarm payrolls are released by the U.S. Bureau of Labor Statistics on the first Friday of each month, except when it is a national holiday in the United States. The report describes the state of U.S. employment by reflecting new jobs that have been created in the previous month. The data is timely and accounted for using a survey of businesses' employment practices for the previous month. The nonfarm payrolls are released along with the unemployment rate, as measured by the Employed Household Survey.

The reason why non-farm payrolls are so important is because employment data drive economic growth momentum. When new jobs are created, the emotional momentum starts to increase and consumers will start spending more freely. Since nearly two-thirds of GDP in the United States is driven by consumer consumption, it is clear why job creation is so important.

Job creation can pull up wages. This is crucial for the Fed because job growth is an important factor it tracks to determine whether it is necessary to raise or lower interest rates. When regulating monetary policy, the Fed has a dual mandate. They use a combination of economic growth and inflation to decide whether reform is needed. When wages start to rise, the Fed may be concerned about consumers' ability to pay higher prices for goods and services, a sign of inflation.

The combination of quantitative figures that provide insights into potential consumption, as well as reporting on inflation, could make nonfarm payrolls one of the key numbers generated by capital markets traders on a monthly basis.

Stronger-than-expected numbers usually raise interest rates, which could ripple through the dollar and the dollar securities market. The Fed only regulates the short-term target of the interest rate curve, but the market regulates the long-term target. By making borrowing costs higher, high interest rates slow economic growth.

While there are many economic indicators such as personal consumption and retail sales, as well as CPI and PCE that change the course of capital markets, nonfarm payrolls are the most important because it reflects sentiment, inflation and potential growth as a number.