This week we’ve seen German CPI inflation data and the UK GDP update, while the US nonfarm payrolls figure will be released on Friday. The overall health of your financial portfolio is intricately connected to this flow of data, directly or indirectly. So how can macroeconomic data help you read the tea leaves of economic health?

Declining GDP, for example, not only presents traders with evidence of a bearish growth trend, but you can drill into the data to see which sectors of a country’s economy are dragging it into the red. In much the same way, inflation data can be broken down into specific components of the overall CPI (food, transport, health, education, recreation, etc). And one of the most important barometers of economic health is rising or falling employment.

1. Anticipation of data increases market volatility

Volatility increases in the run-up to the release of important macroeconomic data. This is especially true of CPI data, employment/nonfarm payrolls, GDP, services and manufacturing PMI, retail sales, balance of payments and credit supply. Market analysts provide consensus forecasts for this data and if the actual figures differ from the forecasts you can expect commensurate volatility in equities, commodities, currencies and indices.

2. New data constantly drives speculative sentiment

The expectation of certain macroeconomic results often influences market dynamics far more than the actual release of that data. For example, if traders, market analysts and investors believe that the Fed is likely to raise interest rates at the upcoming FOMC meeting then trading activity will be influenced accordingly. The expectation of interest-rate hikes has a negative effect on equities and is typically coupled with a switch from stocks to fixed-income bearing securities such as treasuries and savings accounts.

3. Inflation data has a strong impact on interest rates

The Fed, the Bank of England, and the European Central Bank have all set an annual inflation target of 2%. When CPI data is released and inflation rates are rising in excess of this target, the prospect of a rate hike increases, as central banks typically raise interest rates to combat high inflation. This data can be used to anticipate stock market activity, the strength/weakness of currencies and the balance of economic power between emerging markets and developed markets.

4. Specific assets are closely connected with economic indicators

Needless to say, interest-rate announcements have a direct impact on the strength of a country’s currency, as the rate of interest affects the relative value of holding the assocated currency. This is especially important when US interest rates rise, as this can cause a withdrawal of funds (capital flight) from emerging markets and a weakening of EM currencies.

5. Data revisions can trigger sudden moves

Figures are often given as an advance estimate based on partial data, and when the full data is available the figures have to be revised. A figure like GDP is complex and ongoing, and the goal is always to balance timeliness and accuracy. The consequent revisions then cause a rapid reassessment of economic conditions which can trigger sudden shifts in the markets.

6. Indicators give evidence of the health of individual economies

A country’s picture of economic health has an immediate impact on investor sentiment. Countries with runaway inflation are poor investments and will perform accordingly. Conversely, countries with strong GDP growth, positive employment data and a low unemployment rate will typically have a stronger currency and better-performing stock indices.

Brett Chatz
Intertrader

Published: 31 March 2016

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.