chapter 11

Fundamental Analysis and Data Releases

LEARNING OBJECTIVES

This chapter highlights the important data surveys of the United States, the United Kingdom and other world economies which directly or indirectly affect their respective economies and in turn other parts of the world due to their global linkages. The contents of this chapter are organized in the following order:

 

1. Employment Data

2. Inflation Data

3. Activity-related Variables

4. Leading Indicators

5. External Sector

6. Other Data Releases

7. Some International Indicators

EMPLOYMENT DATA

Jobless Claims

Date of release	Weekly
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous week’s data
Released by	US Department of Labor
Market importance	Very high

Milieu: New unemployment claims are compiled weekly to show the number of individuals who have filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labour market. The four weeks moving averages of new claims smoothes out weekly volatility. Continuing claims show the structural nature of the unemployment problem.

How Does This Affect the Market? Jobless claims are an easy way to gauge the strength of the job market. Fewer the people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There is a downside to it, though. Unemployment claims, and therefore the number of job seekers can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labour costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets.

 

 

Federal reserve officials are always on the lookout for inflationary pressures. By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it is a good bet that interest rates will rise, bond and stock prices will fall. Lower the number of unemployment claims, stronger the job market, and vice versa.

A lower number for initial jobless claims is USD positive because it indicates growth momentum in the economy.

Strengths

• Very timely report.
• Useful in terms of market application as data is very much updated every week.
• Initial claims are provided gross and net of seasonal adjustments, and give a breakdown for every state’s individual results.

Weaknesses

• Seasonal employment distorts the result.
• Highly volatile.
• Jobless claim report cannot be used in isolation.
• Industry and sector breakdowns are not provided.

Conclusion: Jobless claims being a weekly number is susceptible to a lot of volatility. In some sense, this limits the predictive power of this particular variable but still the market often reacts to this number.

Unemployment Rate

Date of release	Weekly
Time of release	8:30 a.m. (Eastern Standard Time)
Released by	Bureau of Labor Statistics and Bureau of Census
Market importance	Moderate

Milieu: The household survey (conducted by BLS—Bureau of Labor Statistics and Bureau of the Census), in contrast, is a survey of individuals; it is based on a random sample of about 60,000 households contacted each month by census survey-takers.

For each household in the sample, the survey-takers attempt to determine how many people aged 16 or older are currently employed, how many are looking but unable to find work (the unemployed), and how many are out of the labour force, meaning that they are neither employed nor actively looking for work. The ratio of the unemployed to those working or looking for work is the well-known statistics, the civilian unemployment rate.

How Does This Affect the Market? The effect on the markets is similar to the one described for jobless claims but the action is far restrained.

Non-farm Payroll

Date of release	Monthly
Released by	The Conference Board
Market importance	Very high

Milieu: The monthly employment report contains several labour market indicators. Non-farm payroll employment counts the number of paid employees working part-time or full-time in the nation’s business and government establishments. The average work week reflects the number of hours worked in the non-farm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in non-farm payrolls. This employment data comes from the payroll survey conducted by the BLS.

Payroll survey is a survey of employers. The monthly data gathered in this survey comes from the payroll records of about 4,00,000 business establishments, covering among them about a third of total non-farm payroll employment (including civilian government workers). It is usually released on the first Friday following the end of a month by the US Department of Labor, BBLS.

How Does This Affect the Market? If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions are dramatic, and the information for investors is invaluable. The employment data gives the most comprehensive report on how many people are looking for jobs, how many have them, what they are getting paid and how many hours they are working.

These numbers are the best way to gauge the current state and future direction of the economy. They also provide an insight on wage trends, and wage inflation is high on the list of agendas of the Federal Reserve. Federal Reserve talks about this data frequently and watches for inflation constantly. By tracking the jobs data, investors can sense the degree of tightness in the job market.

If wage inflation threatens, its a good bet that interest rates will rise, bond and stock prices will fall. From a currency perspective, a stronger labour market data will generally indicate some strength for the USD because rising interest rates will make the USD denominated assets attractive.

Strengths

• The Report is a widely watched report and can move the market.
• A rich-in-detail kind of report.
• Relate to the investors on a personal level.
• Good indicator coverage of service-based industry.

Weaknesses

• Seasonal employments affects the report.
• Only reports whether people are working or not and does not consider whether they want to do that job or not.
• Highly volatile.
• Unemployment and payroll figures seem to be out of alignment, as they are derived from two different surveys.

Conclusion: The results of this report are in the capacity to move the market. This report is one of the best ways to understand the labour situation in the market.

Help Wanted Index

Date of release	Monthly
Time of release	8:30 a.m. (Eastern Standard Time)
Market importance	Moderate

Definition: The help wanted index is a monthly index of the number of lines of help-wanted advertising in 51 major newspapers from around the country. This index indicates strength or weakness in the labour market.

How Does This Affect the Market? In addition to providing an insight on the general strength of the economy, this report gives a sense of how many jobs employers are trying to fill. If that number is relatively high, it could mean there is a shortage of available workers and companies may have to offer higher wages to attract them. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve talks about it all the time and watches it constantly.

Employee Cost Index (ECI)

Date of release	The last Thursday of April, July, November and January
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous quarter’s data
Released by	Bureau of Labor and Statistics (BLS)
Market importance	Very high

Milieu: The ECI is being released by the BLS after a survey of non-farm businesses (about 4,500 sampled) and state and local governments (about 1,000 sampled). The base weight of the index is 100, and current base period is December 2005. The report contains the breakdown of the data on the basis of industry group, occupation and union versus non-union workers.

The ECI is an index-based indicator that presents quarter-wise changes in wages, bonus and other benefits, exhibited on a per hour basis. All non-farm industries are covered, with the exception of federal government employees (which only make up 2 to 3 per cent of the work force).

How Does It Affect the Market? ECI is watched primarily to check the inflationary trend in the market. Rising costs at this level suggest that some rise in inflation is inevitable. It is used by the Fed Board while framing monetary policies, as the results of the ECI are less likely to be affected by people shifting to lower or higher-paying jobs. The benefit of the methodology used in the ECI is that wage changes that occur as a result of a shift in the occupational mix of workers can be captured here using a ‘basket of occupations’ approach similar to that of the CPI.

This indicator has the ability to move the market if it shows any difference from what Wall Street has predicted of the inflation. And then the whole economy is affected because bond market reacts immediately to any difference as to the level of the inflation, and stocks will react according to its recent performance relative to economic growth prospects. The deeper into the business cycle the economy is, the more likely it will be for stocks to sell off on fears of fed rate cuts, and possibly the end of the growth phase within the current cycle.

The ECI is also used as the part of the formula that calculates productivity. If productivity gains are less than proportional ECI gains, there would not be the necessary balance for keeping end prices to consumers down.

Strengths

• ECI takes into account health insurance, pensions, death-benefit plans, bonuses, etc., while calculating employee cost to business and not just salary and wages.
• Data is provided with or without seasonal adjustments.
• Highly regarded by the Fed Board as well as the industry leaders.
• Changes are showed from the previous quarter and on a year-over-year basis.

Weaknesses

• The data is released quarterly with a slight overlap.
• Monthly employee situation report covers many data that again appears in ECI, thus it takes some of ECI’s surprise value.
• It could be volatile due to periodic bonuses, commissions, etc.

Conclusion: Although this report has a high regard in the eyes of the Fed and industry leaders, it has its own weaknesses. Also, it is in capacity to bring shock waves in the market with its inflation prediction if it differs from that of the Wall Street.

INFLATION DATA

Consumer Price Index

Date of release	Monthly, mid-month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	Bureau of Labor and Statistics (BLS)
Market importance	Very high

Milieu: The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. The index comprises of categories like food and beverages, housing, apparel, transportation, medical care, recreation, education and communications, and other goods and services. Housing has a weightage of 42 per cent and energy a weightage of 8 per cent. Monthly changes in the CPI represent the rate of inflation. Often people are more interested in the core CPI number which excludes food and energy prices.

Indexes are available for two population groups:

1. A CPI for All Urban Consumers (CPI-U) which covers approximately 87 per cent of the total population.
2. A CPI for Urban Wage Earners and Clerical Workers (CPI-W) which covers 32 per cent of the population.

Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from about 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants. CPI prices are typically collected throughout the first 18 working days of each month. If a particular event or pricing decision occurred late in the month, it is possible that it would be reflected in the CPI prior to the PPI.

How Does This Affect the Market? Over two million workers are covered by collective bargaining agreements which tie wages to the CPI. The index affects the income of almost 80 million people as a result of statutory action: 47.8 million social security beneficiaries, about 4.1 million military and federal civil service retirees and survivors, and about 22.4 million food stamp recipients.

The CPI is the most widely followed indicator of inflation in the United States. Inflation is a general increase in the price of goods and services. Core inflation is a good measure of a sustainable price increase because it is stripped off the impact of transitory and seasonal components like energy and food prices.

The relationship between inflation and interest rates is the key to understanding how data like the CPI influence the markets. Higher inflation numbers will force creditors to charge higher interest rates. That basically explains how interest rates are set on everything from your mortgage and auto loans to treasury bonds and T-bills.

As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion. By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.

Currency market players also keep a close watch on this number because high inflation numbers might indicate a more hawkish policy from the Fed. Rising interest rates will make USD denominated assets attractive.

Strengths

• Gives insight over future Fed rate moves.
• Highly watched and regarded in the media.
• Good regional and industry breakdowns for investor research.

Weaknesses

• Month to month volatility is present.
• Fixed CPI has certain biases.
• Food and energy are excluded.

Conclusion: CPI gives a good insight of moving market trends and also helps Fed in deciding over important monetary policy decisions.

Producer Price Index (PPI)

Date of release	Monthly
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	Bureau of Labor and Statistics (BLS)
Market importance	Very high

Milieu: The Producer Price Index (PPI) is a family of indices that measures the average change over time in selling prices received by domestic producers of goods and services. PPI measures price change from the perspective of the seller. The PPI tracks price change for practically the entire output of domestic goods-producing sectors: agriculture, forestry, fisheries, mining, scrap and manufacturing.

In recent years, the PPI has extended coverage to many of the non-goods producing sectors of the economy including transportation, retail trade, insurance, real estate, health, legal and professional services. The PPI sample includes over 25,000 establishments providing approximately 100,000 price quotations per month. The PPI targets the price of goods on a specific date, e.g. the Tuesday of the week containing the 13th of the month.

How Does This Affect the Market? This measure contrasts with other measures, such as the CPI, that measures price change from the purchaser’s perspective. Sellers’ and purchasers’ prices may differ due to government subsidies, sales and excise taxes, and distribution costs. PPI includes cost of capital equipment which is not included in CPI, whereas CPI provides for price of services which is not covered in the PPI.

PPI captures price movement prior to the retail level. Therefore, it may foreshadow subsequent price changes for business and consumers. The PPI is used to deflate revenue to measure real growth in output and the CPI is used to adjust income and expenditures for changes in the cost of living.

Just like the CPI number, PPI also has similar effects on the fixed income and currency markets. But often the PPI number might not exactly tally with the CPI number because of the differences in computation mentioned earlier. Markets generally react more to the CPI number than the PPI number.

Strengths

• Predicts GDP most accurately.
• Long operating history.
• Good breakdowns for the benefit of the investors (mining, commodity information, some services sectors).
• Has the ability to move the market positively.
• Data is presented with or without seasonal adjustments.

Weaknesses

• Volatility is present due to volatile items like food, energy, etc.
• Not all industries are covered.

Conclusion: The PPI gets a lot of exposure for its inflationary foresight and, as such, can be a big market mover. As a result, the PPI is very useful for investors in the industries covered in terms of analysing potential sales and earnings trends.

Personal Consumption Expenditure (PCE) Deflator

Date of release	Quarterly
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous quarter’s data
Released by	Bureau of Economic Analysis (BEA)
Market importance	Very high

Milieu: PCE deflator is a nation-wide indicator of the average increase in prices for all domestic personal consumption. It is indexed to a base of 100 in 1992. It is derived from the largest GDP component, personal consumption expenditures.

It is constructed from the quarterly interview survey of the BEA. While the CPI only looks at prices in urban areas, PCE deflator covers all areas in the country. More importantly, PCE deflator uses weights which are current period quantities, whereas CPI uses a fixed bundle of commodities as weights.

So when prices are going up, consumers are more likely to shift to relatively cheaper substitutes and their weights are going to be larger in the construction of the PCE deflator.

In an inflationary environment, PCE deflator is likely to be lower than the CPI-based inflation. A similar kind of measure is the GDP deflator which is used to convert nominal GDP into real GDP.

How Does This Affect the Market? PCE deflator (more precisely the core PCE deflator) is another of Alan Greenspan’s favourites. It has been referred to several times in FOMC statements to indicate inflationary pressures building up in the economy. Although this index is the most comprehensive and reliable of all the indices, the quarterly nature of publication means that the signals coming out from the index is infrequent. The fixed income market definitely reacts to the data as well as the currency markets. Expect treasury yields to shoot up and USD to strengthen if the inflation number comes out to be higher than expected.

Strengths

• PCE is a long-term price indicator.
• It represents the largest portion of GDP.
• Savings rates highlight the potential future spending power of consumers.

Weaknesses

• Released after many indicators in the month and quarter.
• Not all source of consumer income is included like capital gain.
• No any industry or region-specific breakdowns.

Conclusion: PCE is an important indicator to gauge future consumer demand and also the consumers’ ability to spend. Thus, it represents the largest component of the real GDP.

Import and Export Prices

Date of release	Monthly
Market importance	Low

Milieu: Indices are compiled for the prices of goods that are bought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products.

ACTIVITY-RELATED VARIABLES

Gross Domestic Product

Date of release	Quarterly Advance: 4 weeks after quarter ends Final: 3 months after quarter ends
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous quarter’s data
Released by	Bureau of Analysis
Market importance	Moderate

Milieu: Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. It could be considered as the godfather of the indicator’s world. It is the aggregate measure of total economic production for a country.

It represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).

This is an extremely comprehensive and detailed report. Various chain-weighted indexes are used to create real GDP quantity indexes with a current base year of 2000.

How Does This Affect the Market? GDP is the consummate measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits.

The bond market does not mind growth but is extremely sensitive to whether the economy is growing too quickly and paving the road to inflation. By tracking economic data like GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture.

GDP components like consumer spending, business and residential investment, and price (inflation) indices illuminate the economy’s undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Strengths

• It is the broadest indicator of economic output and growth.
• It takes inflation into consideration.
• Helpful in analysing trends in the market and predicting future economic conditions.

Weaknesses

• Great fluctuations in result of two consecutive GDP reports possible.
• Data release is not very timely.

Conclusion: This indicator is the single most influencing indicator which decides upon the future of an economy. Investors all over the world depend a lot on GDP to decide their plan of action over investment strategies.

Industrial Production

Date of release	Monthly, on or around 16th of the month
Time of release	9:15 a.m. (Eastern Standard Time)
Covers	Prior month’s data
Released by	Federal Reserve Board
Market importance	High

Milieu: The index of industrial production measures the physical output of the nation’s factories, mines and utilities. The industrial sector accounts for less than one-fifth of the economy but for most of its cyclical variation. The capacity utilization rate reflects the usage of available resources among factories, utilities and mines. A high and rising operating rate may signal that resources are being utilized to their fullest capacity—a warning sign of inflationary pressures.

How Does This Affect the Market? Investors want to keep their fingers on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits.

The bond market prefers more subdued growth that will not lead to inflationary pressures. By tracking economic data like industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

 

 

The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 per cent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on the market behaviour.

In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not. The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 per cent), it may lead to inflationary bottlenecks in production.

The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to changes in the capacity utilization rate.

Similarly from the currency market perspective there can be two different effects:

1. A higher than expected number will boost interest rates and hence is USD positive but, on the other hand, higher industrial production might imply higher imports and a worsening current account balance—USD negative.
2. The second effect is generally weak because most of the US imports are consumer goods and not capital goods.

Strengths

• Analysing the performance of many lines of business becomes easy due to sector breakdown.
• Remarkably less volatile.
• A timely indicator.

Weaknesses

• Services and construction production are not included.
• Many different sources are used so difficult to trace back.
• Historical comparison is difficult due to heavy transition in different sectors of the economy.

Conclusion: The popularity of this report has gone down with time because of exclusion of some important industries from the report.

Institute of Supply Management Manufacturing Index

Date of release	Monthly
Released by	Institute for Supply Management (ISM)
Market importance	High (fixed income) moderate (currency)

Milieu: The Institute for Supply Management (ISM) surveys nearly 400 manufacturing firms on employment, production, new orders, supplier deliveries and inventories. A composite diffusion index of national manufacturing conditions is constructed, where reading above (below) 50 per cent indicate an expanding (contracting) factory sector.

Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index. The index is released on the first week of every month and corresponds to industrial activity in the earlier month.

How Does This Affect the Market? Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM manufacturing index, investors will know what the economic backdrop is for the various markets.

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures. The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is and where things are headed.

Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation.

The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report. Effect on the currency market is relatively muted—an unexpected rise in the index will be USD positive.

Institute of Supply Management Non-manufacturing Index

Date of release	Monthly, 3rd business day of the month
Time of release	10:00 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	Institute of Supply Management
Market importance	Low

Milieu: First released in 1998, the ISM non-manufacturing report on business is also known as service report and is released monthly by the ISM. ISM is a non-profit group with approximately 40,000 members engaged in supply management and purchasing profession. This report also reflects majority of real GDP.

The entire report is very helpful and useful for investors as it measures the very hard to measure service industry which is the fastest growing part of the US economy.

The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United States including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, and comes out with a composite index on business activity in these sectors.

How Does It Affect the Market? ISM non-manufacturing report is becoming popular because of its wide coverage and original survey format. It is also gaining popularity due to its very timely reporting of facts.

Results of the survey are out within days of the completion of the survey. It is also useful for examining the status of the industries in which the investors hold their investments and examining the trends taking place in that sector or industry.

The Business Activity Index is the most comprehensive index as it makes it clear whether the overall business conditions will be better, the same, or worse in the upcoming month. The magic number for expansion within the business activity index is 50; levels above 50 indicate that the service-related areas of the economy are generally expanding.

Rates of change as well as where the economy sits within the current business cycle is important.

Strengths

• A very timely report.
• Shows important measures regarding the hard to measure service industry.
• Together with ISM manufacturing report, it covers 90 per cent of the total economy.
• Better perspectives are provided to the investors by the subjective remarks within the report.

Weaknesses

• Covers service industry only.
• Effective when used with other indicators like ISM manufacturing index, etc.
• Fails to provide long-term historical data because it has started very recently.

Conclusion: ISM non-manufacturing report is gaining popularity among investors as well as with the Fed Reserve Board as it provides insight into business areas not adequately covered in other indicators.

Philadelphia Fed Survey

Date of release	Monthly, on the 3rd Thursday
Time of release	12 p.m. (Eastern Standard Time)
Covers	Current month’s data
Released by	Federal Reserve Bank of Philadelphia
Market importance	Moderate

Milieu: It is also known as Philadelphia Federal Reserve’s Business Outlook Survey. This survey has been conducted every month since May 1968. Deemed as one of the most valuable purchasing managers index, Philadelphia Fed Survey has almost 15 regional reports covering roughly all parts of the United States.

It is in essence, the survey of manufacturing purchase managers who conduct business around the tri-state area of Pennsylvania, New Jersey and Delaware. Managers participate in this survey voluntarily, and express their views regarding employment, shipments, inventories, new orders, prices paid, etc. Views are expressed in terms of better, worse or same as the previous month.

The results of this survey are diffused into an index which rather than using 50 as the median value for expansion, uses zero and it indicates expansion when the report shows result more than zero and contraction when the result is less than zero. Thus, negative value is also possible month after month.

How Does This Affect the Market? Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets.

 

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which will not lead to inflation.

The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behaviour.

Some of the Philly Fed sub-indexes also provide an insight into commodity prices and other clues on inflation. The bond market is highly sensitive to this report because it is released early in the month and is available before other important indicators. Currency markets respond in a way similar to the ISM index.

Strengths

• It is the first regional report to be published.
• The survey comes out very timely.
• Special questions are also included in the survey that guide the investors at the time of ambiguity in the economy.
• A diverse mix of old and new business sectors, like steel, coal, chemicals and semiconductors is present in Fed survey report.
• The report is very brief and comprehensible.
• Contains clues about general market.

Weaknesses

• It represents manufacturing sector only.
• Only three states are covered.
• It is a very concentrated survey based on individual perceptions of the managers.
• Volatility as much as 50 per cent is present in the month-to-month data. Such high volatility is very common in this report.

Conclusion: The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the Index of Industrial Production.

NAPM: Chicago Index (Chicago PMI)

Date of release	Monthly, 1st business day of the month
Time of release	10:00 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	Institute for Supply Management
Market importance	Moderate

Milieu: The National Association of Purchasing Management—Chicago compiles a survey and a composite diffusion index of business conditions in the Chicago area. Manufacturing and non-manufacturing firms are both surveyed, but until recently, market players have believed that the survey primarily covers the manufacturing sector. Readings above 50 per cent indicate an expanding business sector. The NAPM—Chicago is considered a leading indicator of the ISM manufacturing index.

How Does This Affect the Market? Investors should track economic data like the NAPM—Chicago to understand the economic backdrop for the various markets. The NAPM—Chicago gives a detailed look at the Chicago region’s manufacturing and non-manufacturing sectors. Many market players do not realize that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only. Consequently, market players consider this as a leading indicator for the ISM manufacturing survey.

On its own, it can be viewed as a regional indicator of general business activity. Some of the NAPM—Chicago’s sub-indexes also provide an insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because in its long history, it has proven to be a good indicator of business activity as well as inflation.

Strengths

• The report comes out very timely.
• A good predictor of GDP and BLS manufacturing report.
• Subjective remarks within the release proves to be useful for the investors.

Weaknesses

• A very subjective survey.
• Regional reports released earlier, reduce the importance of this report.

Conclusion: Although it covers manufacturing as well as non-manufacturing, many believe that it covers manufacturing sector only. This report is very useful for gaining insight about the GDP and producer price index. The PMI is a uniquely constructed, timely indicator with a lot of value on Wall Street.

New York Empire State Index

Date of release	Monthly
Released by	New York Fed Reserve Board
Market importance	Low

Milieu: The New York Fed conducts this monthly survey of manufacturers in New York state. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of the same indicators six months ahead. This index is seasonally adjusted using the Philadelphia Fed’s seasonal factors because its own history is not long enough with data only going back a couple of years.

Personal Income and Expenditure Outlays

Date of release	Monthly
Market importance	Low

Milieu: Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and non-durable goods and services.

 

 

Retail Sales

Date of release	Monthly, on or around 13th of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	Census Bureau and US Department of Commerce
Market importance	Very high

Milieu: Retail sales measure the total receipts at stores that sell durable and non-durable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth.

It is very closely watched by both the investors and economists. Both the fixed point-of-sale businesses as well as nonstore retailers (such as mail catalogues and vending machines) are used in the data sample. Apart from this, companies of all sizes are included in this survey.

It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board, which tracks data for the Federal Reserve Board’s directors.

How Does This Affect the Market? Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you will have a pretty good handle on where the economy is headed. The pattern in consumer spending is often the foremost influence on stock and bond markets.

For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation.

Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. Retail sales not only give you a sense of the big picture, but also the trends among different types of retailers.

Currency markets also take a cue from the retail sales number on the overall growth front. A growing economy is always good for the USD.

Strengths

• It is a very timely report.
• Trends could be examined sector-wise and with historical data.
• It relates to the average consumers easily.
• A revised report comes out later to amend any error of the final report.
• By taking out volatile items like auto, food, gas, etc., the demand pattern of non-volatile items could be easily calculated.
• Data is adjusted seasonally, monthly and for holiday differences month to month.

Weaknesses

• Sample size is relatively small than actual number of retailers operating in the country.
• Revised report comes very late.
• Report is very volatile.
• The indicator is not based on inflation but on the amount of dollar spent.
• Does not account for retail services, only physical merchandise.

Conclusion: With the ability to move the market, this report presents detailed industry information. For owners of individual retail stocks, look at the sector growth rates to determine the relative performance of individual stocks held in a particular sector.

ICSC—UBS Store Sales

Date of release	Weekly
Market importance	Low

Milieu: This weekly measure of comparable store sales at major retail chains is related to the general merchandise portion of retail sales. It accounts for roughly 10 per cent of total retail sales.

LEADING INDICATORS

Existing Home Sales Report

Date of release	Monthly, 4th week of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	National Association of Realtors
Market importance	Moderate

Milieu: The existing homes sales report is the survey conducted and published by National Association of Realtors. It is a monthly release covering the number of existing homes that were closed during the survey month along with average sales prices by geographic region. The ‘closed’ distinction is important because most of the closing periods are anywhere from six to eight weeks, so values listed are likely to relate to sales made about two months prior.

There are three important metrics in this report. They are as follows:

1. Aggregate number of existing homes sold.
2. Median selling price.
3. Inventory supply (monthly supply figure).

The report also shows several breakdowns like geographical location wise (Northeast, Midwest, South and West), percentage change in price year over year, etc. The data provided is raw and with seasonal adjustments as the demand varies with weather.

How Does This Affect the Market? Although this index does not send any shock waves in the market, it is regarded as an important report because it deals with construction levels and is therefore, a supply-oriented housing indicator. The index reaches its height when the economy is on the verge of coming out of a recession. The inventory metric also points to how much slack exists in the housing market, as a high reading in the month supply figure means that prices may fall as inventory is worked down to more normalized levels.

This report points to many indications like business cycle, mortgage rates, sales level, etc. All these make it clear whether home sales are strong or not. If they are strong enough, other consumer industries may see an uptick in sales, such as home improvement retailers and retail mortgage lenders.

Strengths

• Large sample size.
• Released before the New Home Sales Report.
• Includes condo sales, which are not included in the Housing Starts Report.
• Presents a clear picture of demand and supply together with Housing Starts Report.
• Shows the strength of the housing market.
• Indicates the demand position of other industries like consumer goods, construction material industry, etc.

Weaknesses

• Only median sale price is given.
• Subject to large bouts of seasonality.

Conclusion: Existing home sales report is best used in conjunction with the Housing Starts Report. It helps a lot in clearing the air when there is a doubt over the housing market.

Housing Starts

Date of release	Monthly, on or around the 17th of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	US Census Bureau
Market importance	High

Milieu: Housing starts measure initial construction of residential units (single-family and multi- family) each month. A rising (falling) trend points to gains (declines) in demand for furniture, home furnishings and appliances.

This report analyses the vast difference in real estate market in different parts of the country as the data in the report are divided on the basis of geographical region: Northeast, Midwest, South and West. Both building permits and housing starts will be shown as a percentage change from the prior month and year-over-year period.

How Does This Affect the Market? This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and investments. Home builders do not start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry.

Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer.

 

Refrigerators, washers and dryers, furniture, and landscaping are just a few things new home buyers might spend money on, so the economic ‘ripple effect’ can be substantial, especially when you think of it in terms of a hundred thousand new households around the country doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing starts have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the housing starts data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Commodity prices such as lumber are also very sensitive to housing industry trends. In the fixed income markets, higher housing starts data might signal strong growth momentum, and hence, is negative for bonds.

On the currency front, this is the most important leading indicator which is tracked. Higher expected growth will be USD positive.

Strengths

• Data are forward looking.
• Helpful in analysing business cycle pivot points.
• Huge sample size.

Weaknesses

• Only raw data of number of houses are present and no differentiation on the basis of size and price is made.
• Very area specific.

Conclusion: Housing starts is best used as a business cycle indicator and a tool for investors researching the real estate markets.

New Home Sales

Date of release	Monthly
Market importance	Low

Milieu: New home sales measure the number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances. A related data release is the existing home sales which is higher in proportion to new home sales and can have similar effects on the financial markets.

Factory Orders

Date of release	Monthly, 1st week of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	2 month’s prior data
Released by	US Census Bureau
Market importance	Moderate

Milieu: Factory orders represent the dollar level of new orders for both durable and non-durable goods. This report gives more complete information than the advance durable goods report which is released one or two weeks earlier in the month.

 

The factory orders report is meant to capture the overall health of the entire manufacturing sector, measuring new orders, inventories, total shipments and unfilled orders for the month surveyed.

How Does This Affect the Market? Investors want to keep their fingers on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits.

The bond market prefers more moderate growth which is less likely to cause inflationary pressures. By tracking economic data like factory orders, investors will know what the economic backdrop is for these markets and their portfolios. The orders data show how busy factories will be in coming months as manufacturers work to fill those orders. This report provides an insight to the demand for not only hard goods such as refrigerators and cars but non-durables such as cigarettes and apparels.

In addition to new orders, analysts monitor unfilled orders, an indicator of the backlog in production. Shipments reveal current sales. Inventories give a handle on the strength of current and future production.

All in all, this report tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments. It is not very important from the currency perspective but quite important from the perspective of the fixed income markets.

Strengths

• Whole manufacturing industry is divided into several breakdowns.
• Raw data provided with seasonal adjustments.
• Forward looking data.

Weaknesses

• Repeats some information on durables manufacturing.
• Makes it difficult to compare as report is on the basis of volume rather than price.
• Not very timely.

Conclusion: The report is early enough to evaluate possible GDP but too late to move the market.

Durable Goods Orders

Date of release	Monthly, on or around 20th of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	US Census Bureau
Market importance	Moderate

Milieu: Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.

The data compiled for consumer durable goods is one of the 10 components of the Conference Board’s US Leading Index, as growth at this level has typically occurred in advance of general economic expansion.

How Does This Affect the Market? By tracking economic data like durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provides an insight to demand for things like refrigerators and cars, but also business investments going forward. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation. That tells investors what to expect from the manufacturing sector, a major component of the economy and therefore, a major influence on their investments. Currency markets are not very responsive to this number.

Strengths

• Good industry breakdown.
• Raw data with seasonal adjustments are present.
• Data are mostly forward looking.

Weaknesses

• The survey sample does not carry a statistical standard deviation to measure error.
• Highly volatile.

Conclusion: The most represented industries are machinery, technology manufacturing and transportation. The report presents the supply chain more clearly than any other indicator and thus is highly helpful for the investors to get a feel for earnings potential of different industry.

Construction Spending

Date of release	Monthly
Market importance	Moderate

Milieu: The dollar value of new construction activity on residential, non-residential and public projects. Data are available in nominal and real (inflation-adjusted) dollars but come with a one month lag.

How Does This Affect the Market? Construction spending has a direct bearing on stocks, bonds and commodities because it is a part of the economy which is affected by interest rates, business cash flow and even federal fiscal policy. In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders and large-scale construction contractors.

Commodity prices such as lumber are also very sensitive to housing industry trends. Businesses only put money into the construction of new factories or offices when they are confident that demand is strong enough to justify the expansion.

The same goes for individuals making the investment in a home. A portion of construction spending is related to government projects such as education buildings as well as highways and streets. Why investors are more concerned with private construction spending, the government projects put money in the hands of labourers who then have more money to spend on goods and services. That is why construction spending is a good indicator of the economy’s momentum and provides natural clues to the fixed income market players.

Wholesale Trade

Date of release	Monthly, on or around 19th of the month
Time of release	10:00 a.m. (Eastern Standard Time)
Covers	2 month’s prior data
Released by	US Census Bureau
Market importance	Low

Milieu: The wholesale trade report is prepared after the survey of about 4,500 wholesale merchants operating in the United States. The report has three statistics to be presented to the investors. They are as follows:

1. Monthly sale
2. Monthly inventories
3. Inventories to sale ratio

This survey has a nationwide coverage and the data are divided into durable and non-durable goods. Figures are based on current dollar values for products when estimating sales and inventory levels, which is a change from other indicators that may value product based on volume.

How Does It Affect the Market? The most watched variable of the report is the Inventory to Sales (I/S) Ratio to check whether the demand and supply are in balanced situation or not as any imbalance between the two could trigger shock waves in the stock and bond market.

It all depends on where the economy, or even a particular industry, stands in relation to earnings expectations and potential. As long as the I/S ratio does not change dramatically from month to month, the report will not elicit a strong response in the stock and bond markets; its biggest benefit is the ability to predict future GDP levels or its utility in researching specific industry trends.

Strengths

• The annual benchmark report for wholesale trade is released every spring to give more details about the industries covered under the monthly survey.
• Provides good detail about the demand and supply scenario.
• Long historical data is available.
• Data provided are raw and with seasonal adjustments.

Weaknesses

• Longer time lag.
• Industry breakdown is not too specific.
• Some reports published earlier already shed some light on the wholesale results.

Conclusion: Wholesale trade measures the dollar value of sales made and inventories held by merchant wholesalers. It is a component of business sales and inventories.

Business Inventories

Date of release	Monthly
Market importance	Low

Milieu: Business inventories are the dollar amount of inventories held by manufacturers, wholesalers and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity.

Consumer Sentiment: Michigan Survey

Date of release	Monthly
Market importance	Moderate

Milieu: It is a survey of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by the University of Michigan. About 500 consumers are surveyed every month. A preliminary survey is usually reported about the second Friday of the month while a more complete survey is reported two weeks later. The level of consumer sentiment is directly related to the strength of consumer spending.

How Does This Affect the Market? The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices.

For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.

With this in mind, it is easy to see how this index of consumer attitudes gives an insight to the direction of the economy. Just note that changes in consumer sentiment and retail sales do not move in tandem month by month. The currency markets also react to this data because a strong economy is often the harbinger of a strong currency.

Leading Indicators Composite Index

Date of release	Monthly
Market importance	Low

Milieu: A composite index of 10 economic indicators that typically lead overall economic activity. These include the factory workweek, new orders for consumer goods, new orders for non-defense capital goods, stock prices, initial jobless claims, vendor performance, building permits, money supply, consumer expectations and the spread between the 10 years note and the federal funds rate.

Motor Vehicle Sales

Date of release	Monthly
Market importance	Low

Milieu: Individual automakers (including foreign & domestic makes) report unit sales of domestically produced cars and light duty trucks (including sport utility vehicles and mini-vans). Motor vehicle sales are good indicators of trends in consumer spending.

MBA Purchase Applications

Date of release	Monthly
Market importance	Low

Milieu: The Mortgage Bankers’ Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

EXTERNAL SECTOR

International Trade Balance

Date of release	Monthly, around the 19th of the month
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	2 month’s prior data
Released by	Bureau of Economic Analysis (BEA)
Market importance	Very high

Milieu: The international trade balance measures the difference between imports and exports of both tangible goods and services. Imports may act as a drag on domestic growth and they may also increase competitive pressures on domestic producers. Exports boost domestic production.

The indicator within the trade balance report which is most well known is the nominal trade deficit, which represents the current dollar value of US exports minus the current dollar value of US imports. It also covers the trade balances for services.

The most cited measure of trade deficit is the current account, which is the net of physical goods trade, services trade, investment income and unilateral transfers.

How Does This Affect the Market? Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. Furthermore, the data can directly impact all the financial markets, especially the foreign exchange value of the dollar. Imports indicate demand for foreign goods and services wherein the US exports show the demand for US goods in overseas countries.

The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies.

The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of US trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally.

For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.

Strengths

• The reports are published monthly and resultant values are in nominal (dollar) terms.
• Also gives country-wise detail of largest percentage of trade.
• Results are shown against the backdrop of past six months.
• It is one of the largest components of GDP and almost 25 per cent of the total economic activity.

Weaknesses

• Monthly release does not show the complete transaction reconciliation which the quarter release shows.
• Volatile due to oil prices and seasonality.

Conclusion: The trade report helps investors in making investment choices. It also gives hints about future swings in the GDP.

Current Account Balance

Date of release	Quarterly
Market importance	Very high

Milieu: The current account measures the US’s international trade balance in goods, services and unilateral transfers on a quarterly basis. The levels of exports, imports and the current account indicate trends in foreign trade.

How Does This Affect the Market? US trade with foreign countries hold important clues to economic trends here and abroad. The data can directly impact all the financial markets, especially the foreign exchange value of the dollar. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States since this trade imbalance creates greater demand for foreign currencies.

The bond market is sensitive to the risk of importing inflation or deflation. Ever since Asian economies collapsed at the end of 1997, financial market participants have feared that deflation in these economies would be transported to the United States. The linkage is not so direct, and deflationary pressures are not so likely at this time. Right now a higher current account deficit number reminds us of the structural twin deficit problem and is USD negative.

Treasury International Capital Data

Date of release	Monthly
Market importance	Very high

Milieu: These treasury data track the flows of financial instruments in and out of the United States. Instruments tracked include treasury securities, agency securities, corporate bonds and corporate equities.

How Does This Affect the Market? Treasury International Capital (TIC) data have been issued for the past 30 years, but only recently, due to an enormous rise in foreign participation in our markets, they have grabbed the attention of the international financial markets. Although methodologically limited, TIC offers a measure of foreign demand for our debt and assets.

Bonds and the dollars are most sensitive to the data, therefore bond and foreign exchange markets are more likely to react to this report than the equity market. Strong inflows (demand for US securities) are needed to keep downward pressure on interest rates.

Strong inflows also underpin the value of the dollar as foreigners must purchase dollars in order to buy US securities. A strong dollar helps to maintain stability in all US financial markets. Since foreign ownership of US equities is comparatively small, the equity market is less concerned about this report.

OTHER DATA RELEASES

US Treasury Budget

Date of release	Monthly
Market importance	High

Milieu: The US treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.

How Does This Affect the Market? The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of treasury securities. The higher the deficit, the more treasury notes and bonds the government must sell to finance its operation. From there, it is simple supply and demand—if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether—the government needs to sell fewer treasury bonds, so the supply drops and the price of T-bonds rises.

In the past few years, the budget deficit has increased dramatically, and this has put more treasury securities into the market place. The federal government borrows money through the issuance of treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices.

With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest rate environment for stocks, which is bearish. In the currency market, a higher deficit number raises the spectre of twin deficits once more which is USD negative.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insights into the state of the economy by looking at the government’s tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.

Money Supply

Date of release	Weekly, every Thursday
Time of release	4:30 p.m. (Eastern Standard Time)
Covers	M1 and M2 (M3 coverage discontinued as of March 2006)
Released by	Federal Reserve Board
Market importance	Low

 

Milieu: The money supply is nothing but the amount of money floating in the economy and available at the disposal of the investors for spending.

According to the liquid state, money supply is tagged with different numerical aggregates. They are as follows:

• M0—the most liquid, physical cash and coin.
• M1—all of M0 and checking accounts, traveller’s checks and demand deposits.
• M2—all of M1 in addition to savings accounts, time deposits of less than USD 100,000 (such as certificates of deposit), and money market funds held by investors.

The Fed releases data on level of M1 and M2 weekly and thus it helps to measure the exact liquidity in the market. Although stock and bond investments are not included in M1 and M2.

How Does It Affect the Market? Fed Reserve with the help of this report undertakes several steps to control the money supply in the market. Through open market operations such as buying and selling treasuries and setting the reserve requirements, the Fed does things to alter the money supply through its daily course of business.

This report also influences the Fed Rate decisions of Fed Reserve Board. But no single indicator can individually shock the market. This report with several other reports should be considered for the appropriate picture of the money supply in the economy.

Growth in the money supply does not directly indicate future spending growth but it does indicate that inflation could be around the corner. This is where knowing both money supply growth and GDP growth becomes very handy—if money supply growth is rapidly outpacing economic growth, there will soon be more money chasing after the same amount of goods.

Strengths

• A timely and consistent indicator.
• Helpful for investors in knowing the demand and supply condition.
• This report together with inflation and GDP report presents a very clear view of the future economy.

Weaknesses

• Not much influential in short-term.
• Limited breakdown is available.
• Stock and bond investments are not included.

Conclusion: The monetary aggregates are alternative measures of the money supply by degree of liquidity. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures.

Beige Book

Date of release	8 times per year (two Wednesdays before every Federal Open Market Committee (FOMC) meeting)
Time of release	2:15 p.m. (Eastern Standard Time)
Covers	Subjective and discourse-based summaries of regional economic activity
Released by	Federal Reserve Board
Market importance	Moderate/low

Milieu: Beige Book could be summarized as the summary of commentary by Federal Reserve District on the current economic conditions. It was made public in 1983. In spite of giving raw data, this book gives a clear view of how the Fed District Banks draw logical conclusion from the raw data they get from several other reports.

This book contains 13 sections—12 regional reports from each Fed District Member Bank and one national summary drawn from each of the individual report.

Beige Book tends to have more of a conversational approach rather than being filled with raw data. The comments in beige book are very forward looking, i.e., they predict trends and foresee changes over next few months or quarter.

How Does It Affect the Market? Being the mere summary of many raw data that are not at all new for the market, beige book does not affect the market much. It only helps the investors and Fed watchers into gaining an insight into the agenda of the next FOMC meeting.

Although, beige book has a lot of information regarding what stance Fed will have in terms of monetary policy but to understand those hints, one has to be accustomed of ‘Feed Speak’, a special verbiage designed especially for making measured remarks.

Beige Book contains the compilation of the interview and comments of business leaders, bank presidents, other fed members and other informal networks.

Strengths

• It is a large component of real GDP.
• Guides investors as per the views of business leaders, bank presidents, etc.
• It gives forward looking comments.
• It provides qualitative information rather than mere quantitative data.
• Presents information according to geographic regions.
• Also gives hints about the monetary policy decisions of Fed.

Weaknesses

• No any new data interpreted.
• Whole report consists of measured ‘Fed Speak’.
• Not industry or sector specific.
• Hard to draw conclusions due to precise comments.
• Personal comments of business leaders, bank presidents, etc. are there which may or may not be pertinent.

Conclusion: Beige Book is basically a report that gives the investors an insight of the monetary policy decisions and responsibilities of the Fed Board. It certainly does not send strong and direct signals into the market but it does extend the first hand and original views as well as comments of the who’s who of the market.

Productivity and Costs

Date of release	Quarterly
Time of release	8:30 a.m. (Eastern Standard Time)
Covers	Previous quarter’s data
Released by	Bureau of Labor and Statistics (BLS)
Market importance	Moderate/Low
Fixed income market	High productivity leading to less pressure on wages— positive
Currency market	High productivity leading to less pressure on wages—USD negative

Milieu: Productivity measures the growth of labour efficiency in producing the economy’s goods and services. Unit labour costs reflect the labour costs of producing each unit of output. Both are followed as indicators of future inflationary trends. Employment cost index is a separate but related variable which measures changes in labour costs for wages and salaries along with non-cash fringe benefits in non-farm private industry, and state and local governments.

Percentage changes, presented in annualized rates, are the key figures released with this report. Separate productivity rates are released for the business sector, non-farm business sector and manufacturing. Manufacturing is kept separate because the data used for the same is total volume output rather than GDP figures.

How Does It Affect the Market? Productivity gains usually lead to gain in real income, lower inflation and increased corporate profitability, because the moment a corporate can increase profitability with the present workforce, it can raise wages without passing that cost on to customers, which keeps inflation pressures down, while adding to the GDP growth.

The productivity report does not present anything new, rather its value is in the calculations and derivations the BLS computes on previously released data. Also, GDP and labour reports will have already been released, and gains in GDP tend to be a fairly accurate indicator of productivity gains.

Strengths

• Makes complex calculations easier for the investors.
• Gives a good insight into inflationary pressure.
• Jumps in productivity tend to make their way to corporate bottom lines quickly via margin expansion.
• Release shows result with and without taking inflation into consideration.
• Detailed productivity measures at the industry and sector level allow investors to analyse the relative productivity performance of many of their holdings.
• Result of the report helps the investor to make comparison with advanced economies as well.
• It represents a major share of GDP (about 75 per cent).

Weaknesses

• Not a timely indicator.
• No new data is offered.
• Can be very volatile quarter to quarter.

Conclusion: Productivity report has a lion’s share in the GDP as only government results and non-profit groups are removed from calculation. It also gives very useful insight into inflationary trends in the economy. Also its expediency in comparison with other developed economies gives it an edge over other indicators.

Consumer Confidence Index

Date of release	Monthly, on the last Tuesday
Time of release	10 a.m. (Eastern Standard Time)
Covers	Previous month’s data
Released by	The Conference Board
Market importance	Moderate

Milieu: Conference Board is a non-profit business organization which releases consumer confidence index after conducting a survey of more than 5000 households. In this survey, the spending power, relative financial health, etc. of an average investor is weighed. This index holds a very high regard in the eyes of investors as well as Fed Reserve.

This index consists of three separate headline figures that state the consumers sentiments regarding the past, present and future economic conditions. There are three separate indexes for each of them.

1. Index of consumer sentiment: Stating how people feel currently.
2. Current economic condition: Stating where economy is heading as per the consumer.
3. Index of consumer expectation: Stating how the economy will be in coming six months as per the consumer.

How Does It Affect the Market? The basis of CCI is its assumption that an optimistic consumer, one who feels that the market is looking bullish and will move in upward direction only, tends to purchase more to match up the living standard of the society. And this index presents the views of many consumers regarding the trends in the economy that influences rest of the consumer and gives a push to the lagging economy by making investors more willing to purchase more equity, home, car, etc.

Although, the data presented in this report are not real and people not being economists can only make an estimation of the upcoming trend in the market. The report is very subjective in nature with a real small sample size. So, economists generally look at the moving average of three or six CCI reports prior to predict any significant shift in the sentiment.

Some economists believe that there should be a shift of at least five points before declaring any reversal of an existing trend. Generally, increasing CCI results in increasing retail sales, personal consumption, personal expenditure, etc.

Strengths

• Reaches out to the average households.
• Good predictor of GDP and consumer spending.
• Influences the consumers to increase their living standard.

Weaknesses

• Very subjective in nature with no physical data sets.
• Small sample size (5,000 households only).
• The prediction of GDP and consumer spending by this report may be contradicting with other reports such as GDP report and labour report.

Conclusion: This report carries a lot of weight in influencing the consumer behaviour. If this report creates an optimistic vibes among the consumers, then the expanding economy does get a great boost.

Consumer Credit Report

Date of release	Monthly
Time of release	3 p.m. (Eastern Standard Time)
Covers	Three previous month’s data
Released by	Federal Reserve Board
Market importance	Moderate

Milieu: The Consumer Credit Report estimates the change in the dollar amount of outstanding loans to the individuals, given basically for purchasing consumer good. Although, loans backed by real estates, like home equity line of credit (HELOCs) are not considered here.

The two classes of credit which this survey covers are as follows:

1. Revolving credit: In these types of credits, the credit limit could be increased by certain limit with or without the consent of the creditor as in the case of credit cards.
2. Non-revolving credit: The terms and conditions of these types of loans are fixed in advance, unlike revolving credits as in the case of home loan and auto loan.

Both classes are segmented into different categories as follows:

• Commercial banks
• Finance companies
• Credit unions
• Federal government and Sallie Mae
• Saving institutions
• Non-financial business
• Securitized asset pools

The consumer credit report shows the outstanding balances for each of these categories separately.

The report is prepared after the survey of many financial and non-financial institutions. The data collected, ultimately shows the investors the quality of consumers available and also the arena with the highest growth rate which is determined by showing the average interest rate of many consumer debt such as car loan, bank loan, credit cards, etc.

How Does It Affect the Market? The Fed Board believes that consumer spends more only when their personal income increases. Therefore, borrowing shows an increasing trend when the economy is coming out of a recession rather than during the worst of it. Thus, consumer credit report is considered as a lagging indicator by the Fed Board.

Investors need to pay attention on this report as it shows the long-term trend as well as changes in overall interest rates together with total outstanding balances. Consumer credit inherits a lot of volatility in itself, so the investors need to keep an eye on the current trend to make required adjustments to prior periods.

Consumer credit report is also important from the point of view of GDP as consumer credit makes up for more than two-thirds of total GDP consumption. If the consumer credit declines or consumer faces a credit crunch, it directly affects the growth of GDP.

Consumer credit report also indicates the potential future spending levels seen in the personal consumption and retail sales report. The headline stats of this release will be total consumer debt the current annual run rate of growth or decline, and the total percentage of credit card delinquencies. The delinquencies are studied because sudden spikes may lead to fears that consumers are overextended in their debt levels. Some economists will try to compare the default percentages seen in the most recent recession as a breakpoint, if current default levels approach it, they will look for a recessionary trend to show itself in other economic indicators.

Strengths

• Detail breakdown of outstanding balance and interest rates.
• Data with and without seasonal adjustments are given.
• Release shows comparisons against previous month, previous year, and also against results from the last five years.

Weaknesses

• Only total growth in outstanding loan is shown.
• Because it comes out after the consumer confidence report and retail sales reports for the month, some analysts will not look as intensly at the consumer credit figures month to month, instead reviewing multi-period trends once or twice a year.

Conclusion: It is considered as a good lagging indicator although not a big catalyst in the market because it is released after many important indicators. It gives a clear picture of the trend of rising or declining consumer spending and how it is going to affect the GDP.

Mutual Fund Flows

Date of release	Monthly, 4 weeks after months end
Time of release	Any time during market hours
Covers	Stock, bond and money market funds
Released by	Investment Company Institute (ICI)
Market importance	Moderate

Milieu: ICI is a non-profit organization which presents before the congress, free information of more than 8,000 mutual funds (all close ended funds, exchange traded funds and unit investment trusts) for the benefit of the investors. Its members are investment companies which are registered with the Securities and Exchange Commission (SEC). The report is one of the most reliable sources of information regarding national and international stock, bond and even money market.

The report presents the ‘net new cash flow’ in the market. This figure could be negative as well as positive. If the amount of dollar that flows in and the amount of dollar that flows out is the same, then the total flows over the period are USD 0. Average cash levels at stock funds are also shown in the report.

How Does It Affect the Market? Mutual fund assets in the United States alone stood at more than USD 10 trillion at the end of 2006. Stock and bond respond to demand and supply in the market like any other investment and security. The ICI report helps to analyse the trend in the market regarding the investment preferences of the investors.

Although many economists believe that ICI is not a true indicator as people investing in stock mutual fund do so only when a lot has already been invested in the stock market and it is at its peak. And once the market start falling, more people take out their money from the market forcing it to go down further.

Still the ICI could be a good indicator when an economy is coming out of the recession. The amount of fund flow suggests that people have started being optimistic of the market and demand for the stock and bond goes up pushing the rates further in the market.

Money market fund flows can be read in a similar way, with increasing flows being seen as a sign that stocks may be undervalued, and vice versa.

Strengths

• Portrays the investors sentiment.
• Provides a worldwide figure of stock, bond and money market.
• Helps fund managers to keep their portfolio percentages in the right proportions.

Weaknesses

• Considered as a false indicator by many economists.
• Only mutual fund market is covered.
• Difficult to comprehend market timing from month to month.

Conclusion: ICI could be helpful for the investors if studied carefully regarding the demand and supply scenario of bond and stock market worldwide.

SOME INTERNATIONAL INDICATORS

Tankan Survey: Bank of Japan

Date of release	Quarterly
Market importance	High

Milieu: The quarterly survey is conducted to provide an accurate picture of business trends of enterprises in Japan. The survey consists of 37 to 40 questions on the state of the Japanese economy and the business sentiment of the corporate. A sampling is done from the population of all the private enterprises employing more than 50 people.

How Does This Affect the Market? The Tankan Survey provides a clear picture about the economic variables like domestic and overseas supply and demand, production capacity, inventory, employment and prices. Currency markets generally perceive strength in an economy to be synonymous to the strength of currency. If the Tankan Survey is shows strong growth momentum in the Japanese economy then it causes negative move for USD and positive for JPY.

IFO Survey

Date of release	Monthly
Market importance	Very high

Milieu: The IFO Research Institute is a quasi-German government economic forecasting agency. Each month, the IFO publishes a survey measuring West and East German business confidence levels by surveying 7000 enterprises in manufacturing, construction, wholesale and retail excluding the financial sector.

Two sub-indices are formed from the survey:

1. A current sentiment component.
2. An expectations component.

Based on the results of surveys, IFO assigns a reading based off a 100-point index. A reading above 100 suggests that a majority of the firms surveyed hold a positive view regarding the item being surveyed while a reading below 100 indicates that a majority of firms are not positive about the items surveyed.

How Does This Affect the Market? The IFO survey not only measures the confidence level of the business managers in the industrial sector but also comments on the current happenings in the economy. A higher IFO number is treated as USD negative in the currency markets because strength of the German economy is supposed to be positive for the country’s currency.

ZEW Survey

Date of release	Monthly
Market importance	High

Milieu: The ZEW financial market survey is a monthly survey among 350 financial analysts and institutional investors in Germany, among these are about 240 banks, 50 insurance, 30 investment and 30 industrial companies. It has been conducted since 1991. Participants are asked about their six months expectations concerning the economy, inflation rates, interest rates, stock markets and exchange rates in the Euro zone, Germany, Japan, the United States, the United Kingdom, France and Italy as well as their expectations concerning the oil price. Two indicators are created and published from the results of the ZEW financial market survey:

The ZEW Indicator of Economic Sentiment is a leading indicator for the German economy similar to the IFO Index.

The G-Mind, German Market Indicator, displays the sentiment of the analysts concerning the German stock and bond markets.

The volatile ZEW series presents a higher risk of over-reaction because its panel is smaller and more standardized while the number of questions asked is small.

How Does This Affect the Market? ZEW indicator of economic sentiment—both current economic conditions and business expectations acts as a leading indicator of the IFO survey number because it is published before the IFO survey. ZEW and consequently the IFO numbers are reasonably good predictors of economic activity in terms of GDP and industrial production numbers. ZEW indicator suggesting strong growth expectations in the German economy will be USD negative.

Purchasing Managers Index

Date of release	Monthly
Market importance	Moderate
Currency market	High growth momentum in Germany is USD negative

Milieu: The Purchasing Managers Index (PMI) manufacturing index is disseminated by the Reuters agency, in association with the German association of purchasing and logistics managers. It draws on a monthly questionnaire, and polls 400 members of this association. The survey highlights any change in sentiment in comparison to the previous month.

The main variables surveyed are production, new orders, payrolls, delivery delays and the stock of purchases. For each variable, a diffusion index is calculated. An index above 50 shows expansion, while an index lowers than 50 reflects a contraction. The PMI is a composite index pooling the five main individual indices and is calculated for every country in the Euro region.

How Does This Affect the Market? Since PMI is calculated for every country in the Euro zone, it can act as an indicator for comparison to economic performance in different countries. Otherwise the currency market reaction to PMI numbers is relatively muted but follows the same pattern as ZEW or IFO numbers.

Retail Price Index: UK

Date of release	Monthly
Market importance	Moderate
Currency market	High RPI is generally USD negative

Milieu: The Retail Prices Index (RPI) measures the annual changes in prices of most goods and services purchased by households in the United Kingdom. This is done by carefully recording the prices of a typical selection of goods and services from quarter to quarter, and seeing how they have changed.

The RPI is not strictly a ‘Cost of Living’ index of basic essentials. In practice it would be virtually impossible to decide on a basket of goods and services which everyone considers to be essential. Instead, the RPI gives us a measure of what we would need to spend in order to buy the same goods which we bought in an earlier period.

How Does This Affect the Market? Many individuals in the United Kingdom including the media, wagebargainers, business people and politicians, use the inflation figures.

 

Royal Institute of Chartered Surveyors Residential Housing Survey

Date of release	Monthly
Market importance	Moderate

Definition: The results of the Royal Institute of Chartered Surveyors (RICS) Residential Housing Survey are drawn from a monthly survey of local surveyor’s offices in the United Kingdom. The monthly report is a qualitative one that aggregates the findings of the different surveyors in 10 different regions of the country. The report assesses trends within the market including the direction (but not the value) of house price changes, the stocks of different types of property on the books of the contributing offices, the volume of completed sales and predictions for changes in the level of house prices for the forthcoming three months.

However, at no point does it try to put quantitative values on the level of house prices, trying instead reporting the number of offices reporting a general increase in prices, the number reporting price falls and the net balance. This obviously means that it is highly risky to use this report as an accurate measure of the state of the housing market. It does little to assess the strength of any rises or falls, instead choosing to build a picture of how widespread the trend is.

How Does This Affect the Market? As a housing price indicator, the RICS survey is thought to be a leading indicator of the performance of the UK economy. A strong number (more regions showing price increases) is positive for GBP and negative for the USD.

TEST YOUR UNDERSTANDING

1. What are the various kinds of indicators under the category of employment data?
2. Discuss in detail CPI and WPI, keeping inflation as the focal point.
3. What do these indicators mean?
   1. Existing home sales
   2. New home sales
   3. Housing starts
4. Elaborate on Beige Book and it’s frequency of release.
5. Explain the purpose of the following international indicators:
   1. Tankan Survey–Bank of Japan
   2. IFO Survey
   3. ZEW Survey
   4. Purchasing Managers Index (PMI)
   5. Retail Price Index (RPI–UK)
   6. Royal Institute of Chartered Surveyors (RICS) Residential Housing Survey