To track the performance of the economy and especially to foresee how it may behave in the future you need economic indicators. Generally economic indicators are divided in three groups: leading indicators, coincident indicators and lagging indicators. Leading indicators as the name suggest will change before the economy but they can be volatile and sometimes give incorrect views.
Coincident indicators reflect the state of the economy in the present and can be used to confirm leading indicators. Lagging indicators such as GDP give information with a lag and that is after the events have happened.
You don’t have to know all the economic indicators perfectly or to monitor all of them, in fact most of those indicators won’t be market moving because the market generally focuses on specific indicators depending on the context at that time. For example, if the market focuses on inflation because there’s a high chance it surpasses the central bank target making it to raise interest rates, then inflation indicators will be the most important ones.
You should also look at the details of the economic indicators because the headline number (the one reported first in the news) may not show the full picture or be misleading. For example, during the 2021 employment data sometimes came out bad as the NFP headline number was indicating less than expected hiring but since inflation was a major focus and the Average Hourly Earnings (a component in that employment data) were rising, the reason for less hired workers was that people wanted a higher pay before accepting the job.
In fact, JOLTS which is another employment data indicating how many jobs offers there are (demand for workers) were rising, so there was a supply and demand imbalance. The demand for workers was high but the supply at that price was limited, thus the price of wages had to rise and that in turn raises inflation because businesses will hike their prices for products to balance their costs for more expensive workers. As you can see you need to have this kind of foresight and kind of cause/effect thinking to anticipate the market and understand what is happening.
You can find economic indicators releases in the economic calendar. Let’s look at all the details you will see in the ForexLive calendar (note that different calendars may have different styles although the key details remain the same):
· The date and time of the next release depending on your time zone.
· The country flag releasing the data.
· The name of the event or the economic indicator.
· The impact (this is generally indicated in colours or bars and it’s an expected market moving impact the release will have although note that it’s not always the case, because the impact depends on the market focus at that time not the economic data, so even if you see a high impact event it doesn’t mean it will be so).
· The actual number (the new released number you’re waiting for).
· The consensus number (what analysts/economists expect, and this is the median among all the estimates).
· The previous number (the number from the previous release).
The market is forward-looking and that means that it moves on expectations about the future. So, the market generally prices in the economic release or event based on what happened going into that event. For example, there may have been good employment data before the NFP like employment component in the ISM indicators, ADP or in the weekly Jobless Claims and the market may expect a good NFP number and thus it prices that in advance (although note that NFP is always a guess and can disappoint or surprise even if all the previous indicators were suggesting otherwise). Therefore, you may see different scenarios playing out at the release.
- The release may come out as expected in which case you may see just a little spike and then maybe the market going in the opposite way due to profit taking (it doesn’t mean it will reverse all the move though but in the very short term you can see this behaviour).
- The released number may be much worse than expected in which case you may probably see a fast unwinding of the move that led up to the event as the market will reprice the outcome. Remember that the market moves significantly when it’s surprised.
- The released number comes out much better than expected in which case the market may buy the relevant asset strongly if it’s all in line with the context at that time.
- The released number comes out worse than expected but the details can reveal what may be the cause and give an opportunity to fade the initial reaction and position in line with the context.
As you’ve probably already guessed it’s rarely just black and white and you need to do some work and research. You can’t just buy or sell depending on the outcomes, but you need to build a picture and prepare for possible scenarios. The more experience you get, the better you will become in interpreting the data and in expecting certain outcomes. You will never get everything right, but your trading and your understanding of the market moves will improve immensely.
This article was written by Giuseppe Dellamotta
