Economic Indicators
Economic indicators are snippets of financial and economic data published by various agencies of the government or private sector. These statistics,
which are made public on a regularly scheduled basis, help market observers
monitor the pulse of the economy. Therefore, they are religiously followed by
almost everyone in the financial markets. With so many people poised to react
to the same information, economic indicators in general have tremendous potential
to generate volume and to move prices in the markets. While on the surface it
might seem that an advanced degree in economics would come in handy to analyze
and then trade on the glut of information contained in these economic indicators,
a few simple guidelines are all that is necessary to track, organize and make
trading decisions based on the data.
Know exactly when each economic indicator is due to be released. Keep a calendar on your desk or trading station that contains the date and time
when each stat will be made public. You can find these calendars on the N.Y. Federal
Reserve Bank Web site using this link http://www.ny.frb.org/, and then by searching for "economic indicators." The same information is also available
on many other sources on the Web or from the company you use to execute
your trades.
Keeping track of the calendar of economic indicators will also help you make sense
out of otherwise unanticipated price action in the market. Consider this scenario: it's Monday morning and the USD has been in a tailspin for
three weeks. As such, it's safe to assume that many traders are holding large
short USD positions. However, on Friday the employment data for the U.S. is due
to be released. It is very likely that with this key piece of economic information
soon to be made public, the USD could experience a short-term rally leading
up to the data on Friday as traders pare down their short positions. The point
here is that economic indicators can effect prices directly (following their
release to the public) or indirectly (as traders massage their positions in anticipation
of the data.)
Understand what particular aspect of the economy is being revealed in the data. For example, you should know which indicators measure the growth of the economy
(GDP) vs. those that measure inflation (PPI, CPI) or employment (non-farm payrolls).
After you follow the data for a while, you'll become very familiar with the
nuances of each economic indicator and what part of the economy they are measuring.
Not all economic indicators are created equal. Well, they might've been created with equal importance but along the way, some have
acquired much greater potential to move the markets than others. Market participants
will place higher regard on one stat vs. another depending on the state
of the economy.
Know which indicators the markets are keying on. For example, if prices (inflation) are not a crucial issue for a particular country,
inflation data will probably not be as keenly anticipated or reacted to by
the markets. On the other hand, if economic growth is a vexing problem, changes
in employment data or GDP will be eagerly anticipated and could precipitate tremendous
volatility following their release.
The data itself is not as important as whether or not it falls within market expectations. Besides knowing when all the data will hit the wires, it is vitally important that
you know what economists and other market pundits are forecasting for each indicator.
For example, knowing the economic consequences of an unexpected monthly
rise of 0.3% in the producer price index (PPI) is not nearly as vital to your
short-term trading decisions as it is to know that this month the market was
looking for PPI to fall by 0.1%. As mentioned, you should know that PPI measures
prices and that an unexpected rise could be a sign of inflation. But analyzing
the longer-term ramifications of this unexpected monthly rise in prices can wait
until after you've taken advantage of the trading opportunities presented by
the data. Once again, market expectations for all economic releases are published
on various sources on the Web and you should post these expectations on your
calendar along with the release date of the indicator.
Don't get caught up in the headlines. Part of getting a handle on what the market is forecasting for various economic
indicators is knowing the key aspects of each indicator. While your macroeconomics
professor might have drilled the significance of the unemployment rate into
your head, even junior traders can tell you that the headline figure is for amateurs
and that the most closely watched detail in the payroll data is the non-farm
payrolls figure. Other economic indicators are similar in that the headline
figure is not nearly as closely watched as the finer points of the data. PPI
for example, measures changes in producer prices. But the stat most closely watched
by the markets is PPI, ex-food and energy. Traders know that the food and
energy component of the data is much too volatile and subject to revisions on a
month-to-month basis to provide an accurate reading on the changes in producer
prices.
Speaking of revisions, don't be too quick to pull that trigger should a particular economic indicator fall outside of market expectations. Contained
in each new economic indicator released to the public are revisions to previously
released data. For example, if durable goods should rise by 0.5% in the
current month, while the market is anticipating them to fall, the unexpected
rise could be the result of a downward revision to the prior month. Look at revisions
to older data because in this case, the previous month's durable goods figure
might've been originally reported as a rise of 0.5% but now, along with the
new figures, is being revised lower to say a rise of only 0.1% Therefore, the
unexpected rise in the current month is likely the result of a downward revision
to the previous month's data.
Don't forget that there are two sides to a trade in the foreign exchange market. So, while you might have a great handle on the complete package of economic indicators
published in the United States or Europe, most other countries also publish
similar economic data. The important thing to remember here is that not all
countries are as efficient as the G7 in releasing this information. Once again,
if you are going to trade the currency of a particular country, you need to find
out the particulars about their economic indicators. As mentioned above, not
all of these indicators carry the same weight in the markets and not all of them
are as accurate as others. Do your homework and you won't be caught off guard.
General information regarding major economic indicators
When focusing exclusively on the impact that economic indicators have
on price action in a particular market, the foreign exchange markets are the most
challenging, and therefore, have greatest potential for profits of any market.
Obviously, factors other than economic indicators move prices and as such make
other markets more or less potentially profitable. But since a currency is
a proxy for the country it represents, the economic health of that country is priced
into the currency. One very important way to measure the health of an economy
is through economic indicators. The challenge comes in diligently keeping
track of the nuts and bolts of each country's particular economic information package.
Here are a few general comments about economic indicators and some of the
more closely watched data.
Most economic indicators can be divided
into leading and lagging indicators.
Major Indicators
The Gross Domestic Product (GDP) - The sum of all goods and services produced either by domestic or foreign companies.
GDP indicates the pace at which a country's economy is growing (or shrinking)
and is considered the broadest indicator of economic output and growth.
Industrial Production - It is a chain-weighted measure of the change in the production of the nation's
factories, mines and utilities as well as a measure of their industrial capacity
and of how many available resources among factories, utilities and mines are
being used (commonly known as capacity utilization). The manufacturing sector
accounts for one-quarter of the economy. The capacity utilization rate provides
an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute
for Supply Management, releases a monthly composite index of national manufacturing
conditions, constructed from data on new orders, production, supplier delivery
times, backlogs, inventories, prices, employment, export orders, and import
orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI) - The Producer Price Index (PPI) is a measure of price changes in the manufacturing
sector. It measures average changes in selling prices received by domestic
producers in the manufacturing, mining, agriculture, and electric utility industries
for their output. The PPIs most often used for economic analysis are those
for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of the average price level paid by
urban consumers (80% of population) for a fixed basket of goods and services.
It reports price changes in over 200 categories. The CPI also includes various
user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods - Durable Goods Orders measures new orders placed with domestic manufacturers for
immediate and future delivery of factory hard goods. A durable good is defined
as a good that lasts an extended period of time (over three years) during which
its services are extended.
Employment Cost Index (ECI) - Payroll employment is a measure of the number of jobs in more than 500 industries
in all states and 255 metropolitan areas. The employment estimates are based
on a survey of larger businesses and counts the number of paid employees working
part-time or full-time in the nation's business and government establishments.
Retail Sales - The retail sales report is a measure of the total receipts of retail stores from
samples representing all sizes and kinds of business in retail trade throughout
the nation. It is the timeliest indicator of broad consumer spending patterns
and is adjusted for normal seasonal variation, holidays, and trading-day differences.
Retail sales include durable and nondurable merchandise sold, and services
and excise taxes incidental to the sale of merchandise. Excluded are sales
taxes collected directly from the customer.
Housing Starts - The Housing Starts report measures the number of residential units on which construction
is begun each month. A start in construction is defined as the beginning
of excavation of the foundation for the building and is comprised primarily
of residential housing. Housing is very interest rate sensitive and is one of
the first sectors to react to changes in interest rates. Significant reaction
of start/permits to changing interest rates signals interest rates are nearing
trough or peak. To analyze, focus on the percentage change in levels from the previous
month. Report is released around the middle of the following month.
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