*A review of the May 2020 U.S. non-farm payroll data, what it means and how I traded it*
Welcome back to the blog. I hope you all had a great weekend and remained safe and healthy in these current “strange” and uncertain times. I am personally, not very vocal on my beliefs both politically and socially because everyone has an opinion and mine is probably not important enough to warrant me pushing it on to other people. I see way too many people on social media who are way too vocal about subjects they have almost zero knowledge or expertise in.
Anyway, let’s get back to the topic of todays blog. In this blog post I am going to talk to you about my thoughts of the May 2020 U.S. non-farm payroll (NFP) data that was released on Friday last week. The employment data was quite shocking to some, especially the industry experts who forecast a decline of circa 8 million jobs. Make sure you read to the end of this blog post because you may learn something very surprising to most retail traders!
Let’s start by looking at the data.
As you can see from the bar chart above that shows the last 12 months of NFP data, the last 3 months have been very erratic and certainly out of the ordinary. March data showed a drop of almost 1.4m jobs as the coronavirus pandemic began to take shape and gather strength, this was expected. As was the huge drop in April with a huge decrease in employment of over 20 million jobs. This is the largest drop since records began.
To see how crazy the last 3 months of data have been compared to historical employment data we can simply look at the table below the chart above. May 2020 saw the largest single monthly gain in employment since 1939. This was following the largest single monthly drop in employment since 1929 which was in April 2020.
The chart below shows the historical NFP employment data since records began.
What are Non-Farm Payrolls?
The non-farms payroll report (NFP) is the monthly release of data on the 80% of the US workforce employed in manufacturing, construction and goods. It does NOT include workers employed in the agricultural sector (those who work on farms) and also excludes private households, non-profit workers and government employees.
It is seen as the best representation of the United States employment situation because it includes such a large proportion of the nations workforce. The data release is watched widely by traders and investors across the globe because the U.S. is the economy in the world (by GDP).
May 2020 non farm payrolls data.
Finding the NFP data when released is incredibly easy now because almost every trading and investing platform, website or blog now posts the data as soon as it is announced by the U.S. Bureau of Labor Statistics (BLS). If you are interested in getting the data direct from the source then I have put a link to their website below.
The employment data for May 2020 was a shock to many including myself. As I said earlier, the expected figures from industry “experts” was a further decline in employment of between 8 million and 9 million jobs. However, as shown on the first chart in this blog post, the actual employment figures show an increase in employment by 2.5 million jobs! I believe this is the largest “miss” in NFP history since records began.
As of the month of May 2020, the U.S. unemployment rate is now 13.3% which is significantly lower than the unemployment rate in April which was recorded as 19.7%. The chart below shows which industries jobs were added and/or lost in May 2020.
A lot of “new” jobs added to the economy are in the leisure and hospitality sector and this seems strange to me as the majority of businesses within this industry are still yet to open. It could be that a lot of businesses are focusing on getting ready for the economy to reopen soon and therefore getting staff on their payrolls ready to start right away. However, as a contrarian and a sceptic I believe it is also possible that this is a sign of data being recorded incorrectly.
Now for the surprise!
For those of you that read the entire employment situation summary released by the BLS you will have seen that there is now an addition to the bottom of the data release with the heading “Coronavirus (COVID-19) Impact on May 2020 Establishment and Household Survey Data”. This is important and the additional information in that section is shown below.
If you do not want to read all of the information then I have highlighted the most important line of text.
Yes, you are reading it correctly, the actual employment rate is likely to be much lower than stated in the data that was released. If the “misclassification error” had not occurred then the overall unemployment rate would have been 3% higher which would be around 16.3% of the total workforce in the United States. This is still an increase in employment from the month of April 2020 but the issue still stands that the data released is likely now incorrect.
Many people are now wondering what other important economic data coming from the United States is also subject to errors such as the “misclassification error” seen here and whether the actual current economic status if the U.S. is better or worse than the current data suggests.
How I traded this months NFP data release.
Many new traders fear the NFP data release that occurs on the first Friday of every month. It is seen as an unpredictable and highly volatile event that causes wild price spikes and leads to losses in trading capital. However, I disagree with this. The non-farm payroll data release can prove to be very profitable if you know what instruments to trade and how to position yourself correctly within those markets.
Forex and stocks are the most heavily traded instruments by new and inexperienced traders. This is a fact and this is why these new traders always hold negative opinions about the effects of NFP and high impact data releases on their trading results. It is because they are trading the most volatile instruments with little knowledge about how they might by effected by macroeconomic and fundamental influences.
If you have been a reader of my blog for some time then you will remember the Trading Market Volatility series of posts I released earlier this year. This series explained a lot about how I use Volatility Index Futures to trade certain market conditions. If you haven’t read those blog posts then they are linked below.
I do NOT trade low timeframe aggressive trade positions on FX currencies or Stocks/Indices through the NFP employment data release. I do not like the short term price spikes and choppy market behaviour that occurs because it can lead to unnecessary risk. Another side effect of this is that bid/ask spreads tend to increase dramatically, especially on retail brokers and this makes trading traditional instruments more costly.
Instead I trade Volatility Index (VIX) futures. This instrument is derived from the price of the S&P500 stock market index and is used by traders and investors to trade increases and decreases in implied stock market volatility. As we all know, high impact economic data releases have an effect on stock market volatility and that is why I like to trade this product.
The chart below shows my short trade position entry on JULY 20 VIX Futures which was entered before the NFP data was released.
Prior to the release of the U.S. employment data release I entered a short position on the 1st to expire Volatility Index futures contracts. Price had consolidated around a support zone and all lower timeframe EMA’s were showing a bearish bias. As per my NFP trading strategy that uses the VIX futures, the short position was the correct trade to take.
My stop loss was placed above the previous candle highs to avoid any price spikes and I had my profit target levels set out on the chart ready for me to take profits if the price of VIX futures was to drop as expected.
The two images above show the progression of the trade. It is important to note that these are 5 minute timeframe candlestick charts so each candle is only 5 minutes of price action. As you can see, the price of JULY 20 VIX futures dropped dramatically right after the U.S. employment data was released leading to my profit target levels being reached within 30 minutes of entering the trade.
This is why I traded 1st to expire VIX futures contracts and shorted them. The idea behind this trade is that the release of the unemployment data would send stock market volatility down because the level of information within the market is now increased. There was also the added benefit of the data being positive for the economy and this means positive for the stock market. When the U.S. stock markets increase in price, VIX tends to decrease because of their negative correlation.
To learn more about my Volatility Index trading strategies, please purchase my Mastering The Markets – Retail Trading Course. Within the 256 page course textbook there is an entire section dedicated to trading VIX futures contracts with DETAILED strategy explanations, multiple REAL trade examples and EXTENSIVE backtesting data.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.