Having a Trading Plan is More Important than Just Focusing on NFP Report

Enough with the focusing already. What’s your game plan for trading the U.S. Non-Farm Payrolls report? The focus began when you first saw the report on the economic calendar. Now that you’ve seen the price action this week and saw the reaction to Federal Reserve Chairman Jerome Powell’s lack of concern about a recent sell-off in bonds while sticking to his stance to keep interest rates low for a long time. How do you think traders will react to the headline number if it comes in bullish or bearish?

First of all, no one really knows what a bullish or bearish number will look like, given the massive amount of nonfarm payrolls estimates. If you look on to the Dow Jones number you may have a different interpretation than the guy trading the Bloomberg number or the Reuters number or the Wall Street Journal figure? Shall I go on?

From experience, it’s not knowing about the accuracy of “number” that brings success but how to trade it. Who to follow? How financial markets – bonds, stocks currencies, the dollar, gold – will be affected.

In my opinion, it all starts with the reaction to the number by Treasury traders. They are the smartest traders in the world and they control a lot of money. So latch on to the Treasury futures contract. Do not try to trade the headline number. You’ll get whip-sawed.

Follow the yields. They are what got us here in the first place. While the small time players are being told by the brokers to “focus” on the NFP number, the professionals know that this one report will not recover the 10 million jobs lost during the pandemic.

Do the math? How long will it take the economy to recovery 10 million jobs at a pace of 200,000 jobs per month?  Exactly. This tells me this report could be a dud with professionals already preparing for the Fed’s March 17 announcements.

So when you do the math, you see that the report is not that important after all. Furthermore, it’s being called Joe Biden’s first jobs report. That’s true so we don’t even have a trend yet in the labor market.

However, I do have to add that if the number comes in below last month’s 49,000 or negative then those betting on a fast recovery and high inflation will have a hard time building a case for higher Treasury yields or even a faster exit from monetary policy by the Federal Reserve.

NFP Trading Tips

Don’t trade off of the headline jobs number. Use the June 10-year Treasury note futures contract for guidance. There are just too many Non-Farm guesses out there. You won’t be able to tell if it’s bullish or bearish. You also may want the T-notes to settle before making your move. Sometimes there is a reaction to the headline number and a different reaction to the unemployment rate. This causes whipsaw price action. Don’t force a trade either. Sometimes there is little reaction to this report.

If T-notes are moving lower, rates are rising. This tends to be bearish for stocks bonds and gold.  If T-notes are moving higher, rates are falling. This tends to be bullish for stocks, bonds and currencies.

With all these correlations going on, make sure you don’t double or triple up in the same direction. You’ll lose it twice or three times as fast if the market turns suddenly. Also make sure that you don’t end up at some point with a bullish gold and bullish dollar position at the same time. That could confuse you.

If you stick to following the Treasury futures and understand their relationships with the other markets at this time then you should be alright. Remember, don’t waste your time focusing on the report, focus on the direction of yields.

For a look at all of today’s economic events, check out our economic calendar.