Back to fundamentals: Economic indicators 101

In the Cross-Asset Morning Report that our sales trading team produce on a daily basis, we highlight all of the important economic data releases scheduled over the next 24 hours in major countries. (For clients who do not receive this report, you can request to be added to our distribution list.) This daily calendar gives our traders a heads-up on events that could potentially drive market direction for that day.

Economic data or economic indicators, usually compiled by central governments or financial institutions, are statistics that describe the status of an economy during a certain period. Among financial market participants, almost everyone relies on these data. When many investors react to this information collectively, there is usually great potential that significant price movement will be triggered.

In current market conditions, traders often hear analysts talking about “ global slowdown” or read corporate earnings reports saying, for example, that demand in a certain country caused sales to drop. All these are referring to economic status, mainly reflected by economic indicators, which indeed set the tone of financial assets prices movement.

As we try to embrace more prudent investing culture and behaviour in contrast to purely speculative trading, in this article we’ll share some fundamental knowledge on how to read economic indicators.

Knowledge about when certain economic data is due for release is not as important as insight into what economists and analysts forecast the value to be. On major portals such as Forex Factory and Trading Economics, you will find “forecast” and “previous” value on the same data series before the new actual data being released. Usually, an economic release that deviates from its forecast will cause bigger price movement than one that comes out in line with the forecast. Take the Producer Price Index (PPI) for example, an unexpected increase of 0.1% may cause more drastic movement in the currency rate compare to an expected increase of 0.3%.

Additionally, instead of just capturing the headline data, it's equally important to read into the key elements in the indicator. Use the same PPI example, PPI measures the price of products but the market focusses a lot more on food prices and energy prices.

One last important thing to note is that on every release there is a possibility of the previous value being revised. This does not mean the original data was wrong but purely because the previous figure was based on partial data due to time constrains. When more accurate information is available, the data then get updated. When reading the current data on growth rates, traders need to be mindful whether the increase or decrease is due to any revision to the previous value.

Economic indicators can be divided into leading and lagging ones. Leading indicators are economic factors that change before the economy starts to change trend. Leading indicators are used to predict economic changes. The lagging indicators are those economic factors that change after the economy has formed certain pattern. In between the two, there are coincident indicators as well that experience changes roughly the same time as the overall economy.

Some of the highly important economic indicators are the following:

GDP (Cross Domestic Product) is a monetary measure of the total market value of all the final goods and serviced produced by a country over a period of time (annually, quarterly etc.). GDP shows the pace of a country's economic growth (or decline) and is one of the most important indicators of economic output and growth potential. Apart from the raw GDP figure, it is more intuitive to calculate a GDP growth rate which is how much a country’s production has increased (or decreased) compared to the previous year. Currently, many people are talking about China, the world’s second largest economy, saying it has slowed down. Let’s look at the figures. In 2018, China registered a full-year GDP growth of 6.6%, the slowest pace in 28 years, down from the 6.8% growth achieved in 2017. On a quarterly basis, Q4 GDP growth was 6.4%, down from 6.5% growth in the previous quarter. The good news is that the quarterly and annual growth rates broadly meet market expectations.

PMI (Purchasing Managers’ Index) is compiled and released monthly by the Institute for Supply Management (ISM) by surveying purchasing managers from more than 400 companies on five areas, namely new orders, inventory levels, production, supplier deliveries and employment. The headline PMI then calculated based on a scale from 0 to 100 where the mid-point of 50 is the so called “balance line”. A PMI reading above 50 represents expansion economy while a reading below 50 indicates contraction. In Singapore this January for example, PMI further slowed 0.4 of a point to 50.7. Similarly, in the Eurozone, January PMI dipped to 51.0 from December’s 51.1 its lowest reading since July 2013. In China, the situation was even more alarming, China’s January manufacturing PMI came as 49.5, this is the 2nd straight month the country’s PMI went below 50 line. December 2018 was the first month that China manufacturing PMI fell into contraction territory since 2016. Meanwhile, the services sector PMI stands at 54.7. Service sector activities – another important pillar of China’s economy after manufacturing – are still expanding, helping to offset the impact of slowing manufacturing activities.

CPI (Consumer Price Index) measures the change in the prices of a basket of over 200 types of necessary consumer goods and services purchased by households. The CPI is usually used as a measure of inflation. The latest CPI data from the US shows that US consumer prices fell in December last year. In the 12 months preceding December, CPI increased 1.9%. When some investors were worrying about CPI slowing, some others who wanted the Fed to delay hiking interest rates may find it good news that the risk of more rate increases is lower now.

PPI (Producers’ Price index) measures the selling price received by domestic producers and is usually a symbol of potential inflation as the cost of producing will naturally pass on to end consumers. In December, US producers’ prices fell by the most in more than two years. In the 12 months preceding December, overall PPI increased 2.5% while core PPI (excluding food, energy and trade services) increased 2.8%.

Nonfarm Payrolls (NFP) measures the changes in the number of paid employees in US, excluding farming jobs. The NFP is a key indicator as the level of employment determines the level of consumer spending which then in turn links to economy growth. Traders also benchmark NFP figure to predict potential central bank policy change. The latest NFP payroll data shows very strong employment growth in US. A total of 304,000 jobs were added in January, far beating prior estimates of 170,000. In the US, NFP payrolls are usually announced at the same time as the unemployment rate, which counts the number of unemployed individuals in the country. The unemployment rate act as a lagging indicator with its domino effect on spending. Presently, the US unemployment rate sits at its lowest level in nearly half a century.

We cannot cover many indicators (or cover them more deeply) in this short article, but we hope that our traders and investors can still use it to brush up their skills in reading economic indicators and therefore can employ a holistic view in their investing and trading.