Economic Indicators Tutorial

An economic indicator is an economic statistic (periodic-release) that aims to provide information regarding how an economy or an economic zone has performed during a particular period.

  • All economic indicators are divided into three categories based on their attributes:

(i) Procyclic Indicator: Moves in the same direction as the economy (for example GDP)

(ii) Countercyclic Indicator: Moves in the opposite direction as the economy (for example inflation or unemployment)

(iii) Acyclic Indicator: Has no relation to the economy

  • All economic indicators are divided into three main categories based on their timing:

(a) Leading Indicator (Before): Leading indicators change before the economy is changing and can be used as signaling-mechanisms of upcoming macroeconomic conditions. The Consumer Confidence Index (CCI), the Home Sales Report, the performance of the Government Bonds, and the Stock-Market Index can be considered as leading indicators

(b) Coincident Indicator (At the same time): Changes at the same time as the economy is changing (for example GDP)

(c) Lagged Indicator (After): Changes a few quarters after the economy is changing (for example unemployment)

 

Eight (8) Key Economic Indicators Explained 

 

INTEREST RATES

Importance: Enormous *****

□ Influence: All Asset Classes

US Release: 8 times per year by FED

EU Release: Monthly (Between the 10th and the 14th day of each month) by ECB

Related Links: ► US Federal Reserve Bank | ► European Central Bank

This is the top economic indicator for every financial market, and when it changes, it can lead to extreme volatility and straightforward movements.

Interest Rates as the main Monetary Tool of Central Banks

Central Banks tend to change the level of interest rates in order to be able to apply their monetary policy. The monetary policy of every economic zone has to deal constantly with two problems (i) Inflation, and (ii) Unemployment.

■ Interest Rate increase (↑) leads to lower (↓) inflation lower (↓) consumer spending and higher (↑) unemployment

■ Interest Rate decrease (↓) leads to higher (↑) inflation higher (↑) consumer spending and lower (↓) unemployment

Changes in the level of interest rates can be seen as signals of upcoming long-term changes in the monetary policy. Therefore, even tiny changes between the actual and forecasted interest rate level (0.05%) can highly influence any financial market and create trading opportunities.

 The Federal Open Market Committee (FOMC) members vote on where to set the US interest rate. The FED aims to maintain the interest rate between 2% and 5%. According to the Federal Reserve, 2-5% is the sweet spot for a growing economy without the effect of extreme inflation.

FED Calendarhttps://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

□ CME FedWatch Toolhttp://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

 European Central Bank Meetings & IR Decisions

The ECB Governing Council meets twice a month. During the first meeting, the Council assesses the current economic situation and takes decisions regarding the level of the key interest rates. During the second meeting, the Council focuses generally on the Euro-system. The Governing Council of the ECB sets the key interest rates.

(1) MROs -The rate of the main refinancing operations -This is the banking system’s bulk of liquidity interest rate

(2) The interest rate on the deposit facility -Overnight deposit rates

(3) The interest rate on the marginal lending facility -Overnight credit to European banks

The Effect in the Forex Market

◙ When the level of the domestic interest rates increases (↑) the demand for the underlying currency increases (↑)

◙ When the level of the domestic interest rates decreases (↓) the demand for the underlying currency decreases (↓)

The Effect in the Equity Markets

◙ When the level of interest rates increases (↑) the stock market (in the long-term) is falling (↓)

◙ When the level of interest rates decreases (↓) the stock market  (in the long-term) is rising (↑)

The Effect in the Commodity Markets

◙ When the level of interest rates increases (↑) the commodity prices are falling (↓)

◙ When the level of interest rates decreases (↓) the commodity prices are rising (↑)

GROSS DOMESTIC PRODUCT (GDP)

Importance: Enormous *****

Influence: All Financial Markets

US Release: GDP releases during the last week of each month (Bureau of Economic Analysis -BEA)

EU Release: Monthly by Eurostat

Related Links: ► US Bureau of Economic Analysis (BEA) | ► Eurostat

Defining GDP

The Gross Domestic Product or GDP is a key economic indicator that measures a country's economic growth. GDP represents the total (dollar) value of all goods and services produced over a specific time period in an economy or an economic zone. GDP is also expressed as a comparison to the previous quarter or each year.

Calculating GDP -2 Methods

Measuring GDP is very complicated and it can be done either by adding up what everyone earned in a single year (GDP income approach) or by adding up what every person spends in a single year (GDP expenditure approach).

 US GDP Calendar

  • Advance GDP released 1 month after the end of the quarter
  • Final GDP released 3 months after the quarter’s end
  • GDP releases during the last week of each month (Bureau of Economic Analysis -BEA)

The United States target GDP growth between 2% and 3% annually.

 Eurostat GDP Calendar

The Eurostat yearly calendar:

  • January, 10th –3rd Estimate Q3 of the previous year
  • February, 14th –1st estimate Q4 of the previous year
  • March, 5th –2nd estimate Q4 of previous year
  • April, 2nd –3rd Estimate Q4 of the previous year
  • May, 15th –1st estimate Q1 of the current year
  • June, 4th –2nd estimate Q1 of the current year
  • July, 2nd –3rd Estimate Q1 of the current year
  • August, 14th –1st estimate Q2 of the current year
  • September, 5th –2nd estimate Q2 of the current year
  • November, 14th –1st estimate Q3 of the current year
  • December, 5th –2nd estimate Q3 of the current year

The Effect in the Forex Market

◙ When the GDP of an economy increases (↑) that means that the demand for the underlying currency increases and therefore the domestic currency appreciates (↑) against all other currencies

◙ When the GDP of an economy decreases (↓) that means that the demand for the underlying currency decreases and therefore the domestic currency depreciates (↓) against all other currencies

The Effect in the Equity Markets

◙ When the GDP increases (↑) the stock market is rising (↑)

◙ When the GDP decreases (↓) the stock market is falling (↓)

The Effect in the Commodity Markets

◙ When the GDP of an important country increases (↑) the commodity prices are rising (↑)

◙ When the GDP of an important country decreases (↓) the commodity prices are falling (↓)

LABOR (NFP)

Importance: Great ****

□ Influence: All Financial Markets

US NFP Release: NFP report on the 1st Friday of each month by the US Bureau of Labor Statistics

EU Unemployment Release: Monthly (during the last day of each month or the first day of the next month) by Eurostat

□ Related Links: ► US Bureau of Labor Statistics | ► Eurostat

 The US Non-Farm Payrolls

The employment reports are released on the first Friday of every month covering the previous month. The report includes:

  • information on unemployment

  • job growth, and

  • payroll data

The US non-farm payrolls (NFP) account for about 80% of the US working force who contribute to the US GDP. In general the higher the NFP report the higher the expected consumer spending and consumer confidence and therefore the higher the expected growth.

The US non-farm payrolls (NFP) include all US workers except:

(i) Farmworkers

(ii) Household (private) employees

(iii) Government employees

(iv) Some workers of non-profit organizations

Note: The United States target a Natural Unemployment Rate between 4.5% and 5% annually.

The Effect in the Forex Markets

It is a little bit complicated. In general, higher employment (↑) means higher growth (↑) which is good news but also increased probabilities for lower interest rates, which is bad news for the domestic currency (↑)

The Effect in the Equity Markets

Higher employment (↑) favors the equity markets as high employment leads to higher national income and higher growth (↑)

The Effect in the Commodity Markets

Higher employment (↑) means good news for the commodity markets as higher employment means increased consumer spending (↑) and increased demand for all commodities (↑)

CONSUMER PRICE INDEX / INFLATION REPORTS

Importance: Great ****

Influence: Forex, Equity Markets, Commodity Markets

US CPI Release: Monthly (between the 15th and the 22nd day of each month) by the US Bureau of Labor Statistics 

Europe’s (HICP): Monthly by Eurostat (The HICP of the previous month in the middle of the month and a flash estimate of the current month at the end of each month)

Consumer Price Index

The consumer price index is the measure of inflation for a country. The CPI measures the price of many different products and services.

 In the US, there are over 200 categories of goods and services weighted in the CPI:

1. Food & Beverage

2. Education

3. Housing

4. Transportation

5. Medical Care

6. Recreation

7. Apparel

8. Communications

The Effect in the Forex Market

◙ The higher the level of CPI (↑) the higher the expected level of interest rates (↑) and thus the domestic currency is expected to gain value (↑)

◙ The lower the level of CPI (↓) the lower the expected level of interest rates (↓) and thus the domestic currency is expected to lose value (↓)

The Effect in the Equity Markets

◙ The higher the level of CPI (↑) the higher the expected level of interest rates (↑) and thus the equity markets are under pressure (↓)

◙ The lower the level of CPI (↓) the lower the expected level of interest rates (↓) and thus the equity markets are rising (↑)

The Effect in the Commodity Markets

◙ The higher the level of CPI (↑) the higher the expected level of interest rates (↑) and thus the price of commodities are under pressure (↓)

◙ The lower the level of CPI (↓) the lower the expected level of interest rates (↓) and thus the price of commodities are rising (↑)

RETAIL SALES

Importance: Great ***

Influence: Forex, Equity Markets

US Release: Monthly, about 15 days after the end of the month reviewed (08:30, New York time)

EU Release: Monthly, between the 3rd day and the 6th day of each month (two months prior) by Eurostat

□  Related Links: ► US Census Bureau| ► Eurostat

Retail Sales

Retail Sales measure the value of retail merchandise sold by consumer-selling businesses and include food prices, transportation, accommodation and many other consumer-related goods.

 The US release consists of Core Retail Sales, which excludes automotive sales.

The US Retail Sales Report includes two separate reports:

(i) Consumer Durable Goods (total value of all sold manufactured goods expected to last for at least three years)

(ii) Consumer Non-Durable Goods (total value of all sold manufactured goods expected to last less than three years)

The Effect in the Forex and Equity Markets

The higher the retail sales figures (↑) the better for the domestic currency (↑) and the domestic equity markets (↑)

TRADE BALANCE

Importance: Great ***

Influence: Forex, Equity Markets

US Release: monthly between the 8th and the 12th day of each month (two months prior -each month is released the figure of two months ago) by the US Bureau of Economic Analysis

□ EU Release: Europe’s International Trade figure is released monthly between the 13th and the 18th day of each month (two months prior -each month releases the figure of two months ago)

□ Related Links► US Bureau of Economic Analysis | ► Eurostat

Introduction to the Trade Balance Account

The trade balance of a country is a general measure of the country’s competitiveness. The trade balance is simply calculated by deducting imports from exports:

□ If exports exceed imports then a country is enjoying a trade surplus

□ If imports exceed exports then the trade balance is negative and the country suffers from a trade deficit

The Effect in the Forex and Equity Markets

The effect of trade balance is almost common for all markets. A better Trade Balance which means a higher surplus or a lower deficit the better for the domestic currency and the domestic equity markets

◙ The higher the Trade Surplus (↑) the better for the domestic currency (↑) and for the domestic equity markets (↑)

◙ The higher the Trade Deficit (↑) the worst for the domestic currency (↓) and for the domestic equity markets (↓)

PURCHASING MANUFACTURING INDEX (PMI)

Importance: Average **

Influence: Forex, Equity Markets

US PMI Release: Monthly, The first business day of the month (Each Month the previous month data)

EU Industrial Production Release: Monthly between the 12th and the 14th day of each month, (two months prior -each month releases the figure of two months ago)

□ Related Links: ► US PMI (ISM) | ► Markit Group | ► Eurostat

The Purchasing Manufacturing Index (PMI)

In the US, the two principal producers of PMIs are (i) the Markit Group and (ii) ISM. The Markit Group measures the PMI for over 30 countries worldwide. ISM (Institute for Supply Management) measures the PMI solely for the US. 

 The US Purchasing Manufacturing Index measures the activity of 400 manufacturers. This is a simple explanation of the PMI index:

- PMI above 50 indicates expansion

- PMI below 50 indicates contraction

PMI Breakdown:

1. New orders: weight 30%

2. Production: weight 25%

3. Employment: weight 20%

4. Supplier Deliveries: weight 15%

5. Inventory: weight 10% 

The Effect in the Forex and Equity Markets

◙ The higher the PMI readings (↑) the better for the domestic currency (↑) and the domestic equity markets (↑)

Note that in order to trade based on PMI results you should seek for changes of at least 50 basis points (0.5%). That means in other words that the actual PMI results must be at least 50 points (0.5%) higher or lower than the forecasted PMI results.

CONSUMER CONFIDENCE SURVEY

Importance: Average **

Influence: Forex, Equity Markets

US Release: Monthly by the Conference Board

EU Release: Monthly by Eurostat (flash estimate between the 21st and 23rd day of each month)

Related Links: ► The Conference Board | ► Eurostat

Introduction to the Consumer Confidence Survey

The Consumer Confidence Survey is considered a key economic indicator as it is able to forecast the level of future demand for goods and services in the economy (leading indicator). The more confident consumers feel today the more money they will spend tomorrow. The more money they will spend tomorrow the greater the future expected economic growth (as measured by GDP changes).

 The US Consumer Confidence Survey

In the US the “Conference Board Consumer Confidence Survey” is considered the most influential to investors. The Conference Board Consumer Confidence Survey contains data deriving from 5,000 US households. The participants are answering a questionnaire based on 5 topics:

(1) Their current employment condition

(2) Their future employment condition (6 months ahead)

(3) Their current business condition

(4) Their future business condition (6 months ahead)

(5) Their family income over the next six months (6 months ahead)

The results of the questionnaire are compared with the results of 1985 which are given the value =100 (benchmark year).

The University of Michigan Consumer Sentiment Index

The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 (December 1964). Each month at least 500 telephone interviews are conducted (50 questions) to US consumers except the citizens of Alaska and Hawaii.

□ The University of Michigan: http://www.sca.isr.umich.edu/

The Effect in the Forex and Equity Markets

◙ The higher the Consumer Confidence Survey (↑) the better for the domestic currency (↑) and the domestic equity markets (↑)

 

Economic Indicators Tutorial

Giorgos Protonotarios, Financial Analyst, George at Linkedin

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