Market Moving Data

 Whether you’re a home-owner, employee, businessman, politician or banker, the health of the economy affects each of us and the decisions we make in our day to day lives. This is especially true for traders and investors though, as we base our every-day investment decisions around perceived strength or weakness in the global economy.

In this piece, we will cover the most important data releases for traders and how markets should behave on a beat or a miss, all else being equal. The focus will be on the major US data releases, though all developed nations use a similar set of measures to gauge economic health.

FOMC rate decision

The Federal Open Market Committee or “Fed” for short, sets the benchmark interest rate for the US economy. If the Fed is worried about the economy, or attempting to stimulate growth, they will seek to lower interest rates and keep them low. Low interest rates mean every day Americans and US businesses pay less interest and are more likely to borrow and spend, stimulating the economy. On the other hand, if the Fed believes the economy is doing too well and is in danger of overheating, they will start raising interest rates in an attempt to cool things off.

Generally speaking, if the Fed decides to raise interest rates, the US Dollar will rally and US stocks will sell off. Conversely, a decision to lower the benchmark rate would see US Dollar weakness and strength for US stock markets.

How does the Fed make these decisions though? How do they know how well the economy is doing?

Gross Domestic Product (GDP)

GDP is the best over all gauge of health in the economy – a healthy economy is a growing economy. GDP measures the total value of goods and services produced and provided in the US over a given period. Final estimates for GDP (subject to revision) are released each quarter and are expressed as an annualized percentage figure, derived from the quarterly growth figure. For example, if the US economy grew 0.8% in Q2, the headline (annualized) GDP growth figure for that quarter will be 3.2%.

Generally speaking, if GDP comes in stronger than expected, the US Dollar and US stocks will rally. However, if the economy is doing exceptionally well, the Fed may look to raise interest rates, which could cause stocks to falter. If GDP comes in weaker than expected, the US Dollar and US equity markets will likely sell off, though once again, persistently weak data could mean an accommodative Fed going forward and stocks may actually catch a bid.

Consumer Price Index and Personal Consumption Expenditures (CPI & PCE)

Though GDP is the best overall gauge of economic health, the Fed, and most central banks for that matter, primarily decide monetary policy based on inflation and inflation expectations. In 2012, the Fed set itself a target inflation rate of 2% and began to look at PCE instead of Core CPI. Where CPI looks at the prices of common household goods, PCE looks at actual household expenditure.

Modest inflation is a sign of economic health and healthy, inline numbers will usually see both the US Dollar and US stocks rally. Having said that, as the Fed primarily looks at inflation when setting monetary policy, if inflation figures are too strong or appear to be consistently trending higher towards the 2% target, stock markets will begin to price in rate hikes and sell off.

US inflation data is released each month for the month prior.

Non-Farm Payrolls (NFPs)

NFPs are a measure of the number of jobs created in the US economy in a given month. NFP numbers are released on the first Friday of every month and are by far the most volatile event on a trader’s economic calendar. These releases are notorious for huge bi-directional moves in the Dollar and equity markets that can be very difficult to trade.

As well as the headline jobs created figure; wage growth, unemployment rate and participation rate figures are also released. NFP volatility largely stems from these other  figures that are released simultaneously and regular divergence between these and the headline figure. For example, the jobs data might show 150 000 jobs created in a given month, as the unemployment rate ticked up on increased participation. Traders and investors are then left scratching their heads as to whether or not the release was good or bad and volatility ensures.

Generally speaking, a solid headline figure will be good for both the US Dollar and US stocks. Though as with all the other item’s we have discussed, if jobs numbers have been persistently good and the Fed is likely to hike rates in response, stock markets may actually sell off.

US Retail Sales

This release is still a big ticket item, though a little more clear-cut than the others. The US Retail Sales figure measures the amount of retail activity in the US economy and is released each month. As the Fed are unlikely to raise or lower rates in response to strength or weakness in the retail sector alone, a good result will usually lead to a rise in both the US Dollar and US stocks, and a weak result will usually send both slightly lower. Having said that, strong results combined with persistent strength in other measures may indeed boost rate hike expectations, sending stocks lower.

In Summary

  • The Fed looks at a range of economic measures to help determine appropriate monetary policy
  • If the economy is running cold or stagnating, the Fed will lower rates and keep them low
  • If the economy is doing well and heading towards overheating, the Fed will tighten monetary policy by raising rates
  • Strong in-line numbers and beats are generally good for both the US Dollar and US stocks
  • Weak in-line numbers and misses generally spark sell offs in both markets
  • If economic data is too strong or too weak, this can affect interest rate expectations and spark seemingly counter-intuitive reactions in US stock markets

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