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Economic indicators 101 |
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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.
Leading indicators are economic factors that change before the
economy starts to follow a particular pattern or trend.
Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the
economy has already begun to follow a particular pattern or
trend.
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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