Chapter 7
In This Chapter
Building a model to put the data in perspective
Getting to know data-reporting conventions
Understanding the key U.S. data reports
Looking at major international economic reports
Fundamental economic data reports are among the most significant information inputs because policy makers and market participants alike use them to gauge the state of the economy, set monetary policy, and make investment decisions. From a trader’s perspective, data reports are the routine catalysts that stir up markets and get things moving.
We run through a lot of economic information in this chapter, but you don’t need to understand it like an economist — you’re mainly interested in what it means for the market reaction. (If you’re interested in understanding data like an economist, we recommend reading The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities, 2nd Edition, by Bernard Baumohl.)
In the first half of this chapter, we look at how to absorb the various data reports and factor them into a broader view of the economic outlook for each particular country, with its attendant implications for interest rates and currency values. In the second half of this chapter, we run through the major data reports to give you an idea of what they cover and how the market interprets them.
Before you can start processing all the economic data, you need to know where to find it. In Chapter 6, we look in greater detail at where to find data info, but here’s a quick overview.
The starting point is the economic calendars typically provided by online forex brokerages. Be aware that some calendars are not as comprehensive as others, so be sure to look for calendars that show events and speakers and not just data. Also, look for a broker that provides data and event previews, and real-time data and market analysis; this type of commentary will help you get a sense of what the market is expecting, how it may be positioned for the news, and how it’s likely to react.
Cable TV business channels such as Bloomberg TV, CNBC, and Fox Business News typically carry U.S. data releases live on air. In our opinion, Bloomberg TV does the best job of covering non-U.S. data releases, and CNBC World is another option. But your best bet for seeing U.S. and global data releases immediately can be Twitter.
In addition, www.bloomberg.com, www.marketwatch.com, and www.reuters.com provide excellent data coverage, both before and after it’s released, along with event calendars. Read the economic data news stories on these sites to get the inside story of the data reports, such as any subcomponent readings or significant revisions.
Also, many calendars may include some designations of market significance for each data series, like some are high impact or low impact. Remember it’s the big picture that counts and even a so-called low impact report could have a big impact if it’s big enough of a surprise.
In the next section, we sketch out a model for understanding where the types of data fit into the big picture. It should help you determine which categories of data are most significant, depending on the particular economic environment at any given time.
If you’re like most people, you probably have a decent idea of what certain economic reports mean, like the unemployment rate or the consumer price index (CPI). But like lots of people, you probably don’t have a strong idea of how to put the data together to make sense of it all. Having a fundamental model to put the data in perspective is critical to understanding what the data means and how the market is likely to react to the data. The sooner you’re able to make sense of what a specific report means and factor it into the bigger picture, the sooner you’ll be able to react in the market.
In the next few sections, we suggest a basic model to interpret the deluge of economic indicators you’ll encounter in the forex market. By no means is this model the be-all and end-all of economic theory, but we do think it’s a solid framework on which to hang the economic indicators and see how they fit together.
If jobs are being created, more wages are being paid, consumers are consuming more, and economic activity expands. If job growth is stagnant or weak, long-run economic growth will typically be constrained. Signs of broader economic growth will be seen as tentative or suspect unless job growth is also present. Both scenarios have major implications for interest rates moves and investment themes, which are key currency drivers.
From the currency-market point of view, labor-market strength is typically seen as a currency positive, because it indicates positive growth prospects going forward, along with the potential for higher interest rates based on stronger growth or wage-driven inflation. Needless to say, labor-market weakness is typically viewed as a currency negative.
To illustrate the importance that markets place on jobs, Figure 7-1 shows changes in U.S. private payrolls overlaid with the S&P 500 stock index. As you can see, major turning points in the stock market (but not necessarily the economy) are closely associated with peaks and troughs in job markets.
If it weren’t for the overarching importance of jobs to long-run economic growth, the consumer would certainly rank first in any model seeking to understand economic data. The economies of the major currencies are driven overwhelmingly by personal consumption, accounting for 60 to 70 percent or more of overall economic activity in developed economies.
Businesses and firms make up the other third of overall economic activity after personal spending. (We’re leaving government out of our model to simplify matters.) Firms contribute directly to economic activity through capital expenditures (for example, building factories, stores, and offices; buying software and telecommunications equipment) and indirectly through growth (by hiring, meaning there are jobs again), expanding production, and producing investment opportunities.
Look at the data reports coming from the corporate sector for what they suggest about overall sentiment, capital spending, hiring, inventory management, and production going forward.
Structural indicators are data reports that cover the overall economic environment. Structural indicators frequently form the basis for currency trends and tend to be most important to medium- and long-term traders. The main structural reports focus on
The data that you find in economic textbooks is very neat and clean — but the data as it actually arrives in the market can be anything but neat and clean. We’re talking here not only about the imperfections of economic data gathering, but also about how markets interpret individual data reports.
In Chapter 6, we introduce the idea of consensus expectations as one of the keys to understanding how markets interpret economic news and data. In the following sections, we look at important data-reporting conventions and how they can also affect market reactions. When currencies don’t react to the headlines of a data report as you would expect, odds are that one of the following elements is responsible, and you need to look more closely at the report to get the true picture.
Economic data reports don’t originate in a vacuum — they have a history. Another popular market adage expressing this thought is “One report does not make a trend.” However, that saying is mostly directed at data reports that come in far out of line with market estimates or vastly different from recent readings in the data series. To be sure, the market will react strongly when data comes in surprisingly better or worse than expected, but the sustainability of the reaction will vary greatly depending on the circumstances. If retail sales are generally increasing, for instance, does a one-month drop in retail sales indicate that the trend is over, or was it a one-off decline due to bad weather keeping shoppers at home?
When prior-period data is revised, the market will tend to net out the older, revised report with the newly released data, essentially looking at the two reports together for what they suggest about the data trend. For example, if a current report comes out worse than expected, and the prior report is revised lower as well, the two together are likely to be interpreted as more disappointing. If a current report comes out better than expected, but the prior period’s revision is negative, the positive reaction to the current report will tend to be restrained by the downgrade to the earlier data.
A number of important economic indicators are issued on a headline basis and a core basis. The headline reading is the complete result of the indicator, while the core reading is the headline reading minus certain categories or excluding certain items. Most inflation reports and measures of consumer spending use this convention.
In the case of inflation reports, many reporting agencies strip out or exclude highly volatile components, such as food and energy. In the United States, for instance, the consumer price index (CPI) is reported on a core basis excluding food and energy, commonly cited as CPI ex-F&E. (Whenever you see a data report “ex-something,” it’s short for “excluding” that something.) The rationale for ignoring those items is that they’re prone to market, seasonal, or weather-related disruptions. For example, food prices may change rapidly due to drought, floods, or unseasonably hot or cold weather. By excluding those items, the core reading is believed to paint a more accurate picture of structural, long-term price pressures, which is what concerns monetary policymakers the most.
Looking at consumer spending reports, the retail sales report in the United States is reported on a core basis excluding autos (retail sales ex-autos), which are heavily influenced by seasonal discounting and sales promotions, as well as being relatively large-ticket items in relation to other retail expenditures. The durable goods report is also issued on a core basis excluding transportation (durable goods ex-transportation), which mostly reflects aircraft sales, which are also highly variable on a month-to-month basis as well as extremely big-ticket items that can distort the overall data picture.
Now let’s get down to the nitty-gritty data. In this section, we run through the major economic data reports that come out of the United States. (We list the data reports according to the model we outline earlier in this chapter.) Our intention here is not necessarily to magnify the importance of U.S. economic data, even though the United States is the world’s largest national economy and the U.S. dollar is on one side of 80 percent of currency trades.
Nope, our aim here is to kill two birds with one stone:
At the end of this chapter, we take you through a country-by-country look at major non-U.S. data reports that don’t fall into the main report categories or are too important to be ignored.
We put the job market at the top of our economic model because job creation/destruction is the single-most important driver of overall economic growth. Every major economy issues updates on its labor market by reporting the number of jobs added/lost, the unemployment rate, or some variation of those. United States employment data holds special significance because it reflects on the world’s largest economy and the primary global reserve currency. The following are the key U.S. employment reports.
Typically released on the first Friday of each month and covering the prior month, the U.S. jobs report is considered among the timeliest of economic indicators. But it’s also subject to large revisions to prior periods and significant statistical volatility. The main components of the report include:
The ADP national employment report is put together by the payroll processing company of the same name (www.adp.com) and works in close collaboration with Moody’s Analytics. It comes out on Wednesdays at 8:15 a.m. ET, two days before the government’s NFP report (see the preceding section). ADP measures only private jobs and excludes government hiring. The ADP report is intended to serve as an alternative measurement of the labor market, but it’s got a spotty track record of predicting the NFP with any accuracy. Because of that uncertainty, market reaction to the ADP is typically minor and short-lived, but economists may adjust their forecasts for the NFP depending on what the ADP indicates.
Initial jobless claims are reported every Thursday at 8:30 a.m. ET for the week ending the prior Saturday and represent first-time filings for unemployment insurance. Initial claims are looked at as interim updates on the overall labor market between monthly NFP reports. The changes in initial claims can be volatile on a week-to-week basis — there are a fair number of hiccups caused by weather, strikes, and seasonal labor patterns — so analysts look at a four-week moving average of initial claims to factor out one-off events. Still, sharp increases or declines in initial claims data will get the market’s attention, producing a market reaction on their own, as well as causing estimates of upcoming monthly NFP reports to be downgraded or upgraded.
A second part of the weekly claims report is continuing claims, which is a measure of the total number of people receiving unemployment benefits, excluding first-time filers. The market looks at continuing claims as another gauge of labor-market conditions. Increases in continuing claims typically suggest deterioration in the job market, because unemployed individuals are finding it difficult to get work and staying on unemployment insurance longer. Declines in continuing claims are similarly viewed as an improvement in the job market, because workers are presumably finding jobs more easily.
Personal consumption accounts for two-thirds or more of most developed nations’ economies, so how consumers are doing has a big impact on the economic outlook and the direction of interest rates, which are both key drivers of forex rates. Here are the main U.S. data reports focusing on personal consumption.
Consumer psychology is at the heart of the market’s attempts to interpret future consumer activity and, with it, the overall direction of the economy. The theory is that if you feel good, you’ll spend more, and if you feel uncertain, you’ll cut back spending. The market likes to pay attention to consumer confidence indicators even though there is little correlation between how consumers tell you they feel and how they’ll actually go on to spend.
In fact, consumer sentiment is frequently the result of changes in gasoline prices, how the stock market is faring, or what recent employment indicators suggested. More reliable indicators of consumer spending are money-in-the-pocket gauges like average weekly earnings, personal income and spending, and retail sales reports. Still, the market likes to react to the main sentiment gauges, if only in the short run, with improving sentiment generally supporting the domestic currency and softer sentiment hurting it. The key confidence gauges are
If market forecasts envision an increase in the Michigan or Conference Board’s consumer confidence index, for example, but the prior two or three weeks of the ABC survey suggest confidence is waning, you’ve got a pretty good indication that the monthly surveys may disappoint.
These two monthly reports always come out together and provide as close an indication as we can get of how much money is going into and out of consumers’ pockets. The market looks at these reports to get an update on the health of the U.S. consumer and the outlook for personal consumption going forward. Personal income includes all wages and salaries, along with transfer payments (such as Social Security or unemployment insurance) and dividends. Personal spending is based on personal consumption expenditures for all types of individual outlays.
Personal income is watched as a leading indicator of personal spending on the basis that future spending is highly correlated with income. The greater the increases in personal income, the more optimistic the consumption outlook will be, and vice versa. But it’s important to note that inflation-adjusted incomes are the key. If incomes are just keeping pace with inflation, the outlook for spending is less positive.
Retail sales reports are subject to a variety of distorting effects, most commonly from weather. Stretches of bad weather, such as major storms or bouts of unseasonable cold or heat, can impair consumer mobility or alter shopping patterns, reducing retail sales in the affected period. Sharp swings in gasoline prices can also create illusory effects, such as price spikes leading to an apparent increase in retail sales due to the higher per-gallon price, while overall non-gas retail sales are reduced or displaced by the higher outlays at the pump.
Durable goods orders are another major monthly indicator of consumption, both by individuals and businesses. Durable goods measure the amount of orders received by manufacturers that produce items made to last at least three years. As a data series, durable goods is one of the most volatile of them all, with multiple percentage swings (as opposed to 0.1 percent or 0.3 percent changes) between months a norm rather than an exception. Durable goods are reported on a headline basis and on a core basis, excluding transportation, or ex-transportation (mostly aircraft).
The real estate or housing market is a major factor behind consumer spending since homes typically represent the largest asset on a household’s balance sheet. Rising home prices are seen to support consumption through the wealth effect (the richer you feel, the more likely you are to spend), whereas falling house prices can be a major drag on personal spending. The U.S. real estate bubble burst in 2006–2007 and triggered the GFC and recession of 2008–2009, turning U.S. housing data into a major drag on U.S consumption. One of the hangovers from the financial crisis is that the markets continue to look closely at the U.S. housing market as a gauge of economic strength. If you see a weak housing market, it can send a chill through the U.S. dollar market and the U.S. stock markets.
There’s a raft of monthly housing market reports to monitor the sector, based on whether the homes are new or existing.
Getting a handle on how businesses are faring is an important clue to the strength of the economy, which in turn drives the outlook for interest rates and the overall investment environment. The following series of data reports offer insights into how companies are responding at the enterprise level.
The Institute for Supply Management (ISM) calculates several regional and national indices of current business conditions and future outlooks based on surveys of purchasing managers. ISM readings are based on a boom/bust scale, with 50 as the tipping point — a reading above 50 indicates expansion, whereas a reading below 50 signals contraction.
The main ISM reports to keep an eye on are
The equivalent of the ISM reports in Europe and China are the PMI reports that are put together by a data collection company called Markit. Since 2011, Markit has produced an index for the U.S., which is released at the end of each month. Although not as popular as the ISM survey, the fact that it’s released before the ISM survey has seen its popularity start to rise, although it has some way to go before it overtakes the ISM as the business survey of choice for the markets.
A number of the Federal Reserve district banks issue monthly surveys of business sentiment in their regions, usually concentrated on the manufacturing sector. The regional Fed indices are looked at on their own as well as for what they suggest about subsequent national sentiment surveys, like the ISM index. The main index reading is a subjective response on general business conditions, with responses above zero indicating that conditions are improving and readings below zero indicating deterioration. The main regional Fed indices to watch are
Industrial production measures the amount of output generated by the nation’s factories, mines, and utilities on a monthly basis and is viewed as an indication of changes in the broader economy. The manufacturing sector is still viewed as a leading indicator for overall business cycles, so changes here could signal a larger swing in the economic outlook. The capacity utilization report measures actual output versus a theoretical maximum capacity and is looked at for what it suggests about inflationary pressures. High levels of capacity utilization above 80 percent may indicate price pressures are building and send a warning sign to policy makers. Lower levels of capacity utilization may signal the absence of inflationary pressures and allow monetary policy makers to keep interest rates lower.
The Beige Book, named for the color of its cover, is a compilation of regional economic assessments from the Fed’s 12 district banks, issued about two weeks before every Federal Open Market Committee (FOMC) policy-setting meeting. The regional Fed banks develop their summaries based on surveys and anecdotal reporting of local business leaders and economists, and the report is then summarized by one of the Fed district banks, all of which take turns issuing the report. The Beige Book is designed to serve as the basis of economic discussions at the upcoming FOMC meeting.
Markets look at the Beige Book’s main findings to get a handle on how the economy is developing as well as what issues the FOMC might focus on. A typical Beige Book report may include generalized observations along the following lines: Most districts reported retail sales activity that was steady or moderately expanding; a few districts reported declines in manufacturing activity; some districts noted increased labor-market tightness and rising wage demands; all districts noted a sharp slowing in real-estate activity.
The Beige Book is released in the afternoon (New York time), when liquidity is thinner, so it can generate a larger-than-normal response if its tone or conclusions are significantly different from what markets had been expecting.
Structural data reports are the big picture, macroeconomic data that depict the longer-term economic outlook. What is the structure of the economy? Is it growing or contracting? If so, how fast? Is inflation under control or are prices rising too fast? Is the economy gaining or losing from trade? These reports can be some of the most significant drivers of central bank monetary policy.
Inflation reports are used to monitor overall changes in price levels of goods and services and as key inputs into setting interest rate expectations. Increases in inflation are likely to be met with higher interest rates by central-bank policy makers seeking to stamp out inflation, while moderating or declining inflation readings suggest generally lower interest-rate expectations.
There are a number of different inflation reports, with each focused on a different source of inflation or stage of the economy where the price changes are appearing. In the United States and other countries, inflation reports come out on a headline (total) basis and a core basis (which excludes food and energy to minimize distortions from these volatile inputs). Inflation indexes report changes on a month-to-month basis (abbreviated MoM, for month-over-month) to monitor short-term changes, as well as changes over the prior year’s levels (YoY, for year-over-year) to gauge the longer-term rate of inflation. The main inflation reports to keep an eye on are
Gross domestic product (GDP) measures the total amount of economic activity in an economy over a specified period, usually quarterly and adjusted for inflation. The percentage change in GDP from one period to the next is looked at as the primary growth rate of an economy. If GDP in the first quarter of a year is reported as +0.5 percent, it means the economy expanded by 0.5 percent in the first quarter relative to the prior fourth quarter’s output. GDP is frequently calculated on a quarterly basis but reported in annualized terms. That means a 0.5 percent quarterly GDP increase would be reported as a 2 percent annualized rate of growth for the quarter (0.5 percent × 4 quarters = 2 percent). The use of annualized rates is helpful for comparing relative growth among economies.
Two of the most important reports for the forex markets, because there are direct and potentially long-term currency implications, are trade and current account balances:
For example, the U.S. dollar was under pressure for several years before the GFC, owing to its widening (increasing) trade and current account deficits. In late 2006, however, the size of the deficit stopped increasing, which removed some of the pressure on the dollar. But because the deficit remains high in absolute and historical terms, the U.S. trade deficit is still a major U.S. dollar negative, although the U.S.’s increased oil production in recent years could cause the trade deficit to shrink sharply in the future and could be a dollar positive in the future.
The aftermath of the GFC has exposed high debt and deficit levels in many major economies, especially in the United States, Europe, the U.K., and Japan. Fears of a debt restructuring (where terms of a bond are altered) or default can seriously undermine confidence in a national currency, leading to an extended bout of weakness, as was seen with the euro in the 2010 European debt crisis.
In the preceding sections, we cover the main economic reports using U.S. data as the basis for explaining what each report measures and how the market views them. The main data reports of other major national economies essentially mirror the U.S. data reports, but with some minor differences in calculation methods or reporting. In other words, the CPI report out of the United Kingdom is looked at the same way as the CPI report is viewed in the United States — as a measure of consumer-level inflation.
But plenty of national data reports don’t have an equivalent in the United States, and others are followed more closely in local markets and require extra attention. In the next few sections, we highlight the main data reports of other national economies beyond what we cover earlier.
The main data reports out of the Eurozone are remarkably similar to those of the United States. The key difference is that individual European countries report national economic data, which comes out alongside Eurozone-wide reports from Eurostat or the European Central Bank (ECB).
The only European reports that may escape your attention due to unusual names are the principal European confidence indicators. These reports can generate sizeable reactions depending on how they compare to forecasts:
In addition to the usual major government-issued data reports, be alert for the following reports that can frequently trigger sharp reactions in GBP:
Canadian data mirrors U.S. data in many respects, but here are a few other important Canadian indicators to watch:
Australian data reports exert a strong influence on Aussie, similar in many respects to how U.K. data affects the pound. In particular, keep an eye on
New Zealand data is similarly provocative for the Kiwi. In addition to the main data reports and Reserve Bank of New Zealand (RBNZ) statements, keep an eye on the following Kiwi-specific data:
In early 2011, China surpassed Japan as the world’s second largest national economy after the United States. Chinese growth over the last decade has been nothing short of astronomical and played a major role in supporting the global recovery after the GFC. Data out of China has taken on increased prominence as a result, with global markets frequently reeling on weaker China data or surging on stronger reports.
The Chinese growth outlook affects global markets through a number of different channels. Stronger Chinese growth is good for global trade and tends to positively influence stock markets around the world. Chinese demand for commodities is also influenced by its growth trajectory, with consequent implications for individual commodity markets (China also recently surpassed the U.S. as the largest oil consumer) and commodity producing countries such as Australia and South Africa. As a result, financial markets around the world are increasingly driven by Chinese growth prospects.
In terms of economic reports, Chinese data that reflects growth are the most significant, and we would highlight the trade surplus, industrial production, manufacturing PMIs, and quarterly GDP as the key data releases to watch. Chinese consumers are also increasingly seen to be key to developed nations’ economic outlooks and signs of rising imports and gains in retail sales are viewed as supportive of global growth.
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