What You Should Know
Understanding Economic Statistics
The condition and direction of the economy is a major driver of interest rates and bond prices. Even though no one knows for certain what the future holds, bond traders profit when their expectations for the economy are correct. Bond market participants follow economic indicators closely, looking for signs of change that might affect future supply and demand so they can position themselves accordingly. When economic indicators exceed or fall short of market expectations, bond prices can move quickly and sharply in response.
Monetary policy makers in each country’s Central Bank also closely follow and interpret economic data releases, looking at the indicators relative to expectations as an indication of the outlook and direction of the economy and inflation. Perceptions on the outlook for global economies drive both equity and bond markets. Major policy statements, especially in anticipation to changes in their own bank rates, from heads of Central Banks of the world’s largest economies, including the European Central Bank in Frankfurt, have a significant impact directly on short-term interest rates and indirectly on longer term interest rates, which in turn affect bond prices. Recent studies affirm that economic announcements are a vital source of information for market participants, and that important news spills over internationally across markets, confirming a very high degree of interdependence between European and US financial markets. It is important for investors to have some knowledge of how economies work and understanding of the relevance and significance of economic statistics.
Which Indicators Matter Most?
The markets’ reaction to the release of economic indicators depends on the indicator itself, where we are currently in the business expansion/contraction cycle, and policymakers’ reactions to structural changes in the economy.
Leading indicators, which have historically predicted the future direction of the economy, are more important than lagging indicators of economic turns that have already occurred.
Relevance, Timeliness and Reliability
The most relevant, timely and reliable indicators have the biggest effect on the market.
Business Cycle Phase
When the economy is in recession or just starting to expand, the markets are less generally concerned with inflation and more sensitive to signals about demand and production. When the economy has been growing for some time, the fear of inflation rises and the markets focus on signs of increasing wages and prices.
Structural Change and Policy Reaction
Structural changes in the economy also make certain indicators more or less reliable as signals of broad business conditions or prospects.
“Seasonal adjustment” of economic data applies factors based on recent seasonal patterns so that indicators can be compared week-to-week and month-to-month for evidence of emerging trends. Although the seasonal adjustment process is not perfect, without it analysts would only be limited to year-to-year comparisons and unable to assess the current condition of the economy.
Economic indicators are listed by category, with a description of what the economic indicator is and why a change in that indicator might be meaningful to an investor.