Forex – currency market
Brief summary of Economic Indicators
Atlanta Fed Index
Index reflecting the business activity of the Federal Reserve Bank of Atlanta. A survey of prominent Atlanta manufacturers about their sentiment regarding the current market situation. Values below 0 indicate slowdown in economy growth rate. This index is published after the 10th of each month at 2:00 pm (GMT). This index has limited market influence as it is published after release of the NAPM (National Purchasing Managers’ Index). Atlanta Fed index’s value increase is advantageous for the US dollar growth rate.
Indicator value is calculated based on average earnings increases in the last three months (all payments actually made are taken into account, not accrued payments). This is a good indicator of future inflation levels, as earnings rate growth, if not compensated for by production workforce growth, is a reason for price increases. This is one of the defining indicators according to which the Bank of England determines interest rate levels. Released monthly, has significant market influence.
This indicator is released in the USA and is expressed in the form of absolute index value in relation to a previously reviewed period. It is viewed as an indicator of a potential inflation related to the increase in workforce cost. This indicator has significant market influence. When expecting major interest rate increases, this indicator’s value increase may lead to the US dollar rate increase. Published on the first Friday of each month at 1:30pm (GMT) simultaneously with the “Nonfarm payrolls” indicator.
Indicator reflects average workweek duration for the period of one month. Published on the first Friday of each month at 1:30pm (GMT) simultaneously with the “Nonfarm payrolls” indicator. Has almost no market influence, but is used for long term analysis of employment levels in the country. It is a good indicator of the labour-market condition during different stages of the economic cycle. It is considered to be one of the defining indicators for indexes such as “Industrial Production” and “Personal Income”, whose values are published later.
National account payment balance.
Ratio of a country’s funds coming from overseas, compared to the amount of funds leaving a country. If funds entering a country exceed payments owed to other countries and international organizations, the payment balance is a positive number, otherwise the balance of payments value is negative. A positive number or decrease of the negative number is advantageous for national currency growth rate. Released monthly, taken into consideration by the market.
Price difference between import and export. Released monthly, has weak market influence.
Economic review by the American Federal Reserve System. A collection of FRS reports that present a review of the economic development dynamics in the USA and serves as an indicator for further FRS activities in the sphere of credit-monetary policy. Produced by 12 American Federal Reserve Banks. The review covers the manufacturing production sphere, services, agriculture, financial institutions, labour market and housing market. Has limited market influence. When rumours appear on the market about a possible interest rate change, then attention is drawn to the part of the review about salary rates and retail prices. This review is useful from the viewpoint of confirming an already formed economic trend. Its value is published 8 times a year on Wednesdays, 2 weeks before the latest FOMC (Open Market Committee) meeting of the American FRS system at 7:00pm (GMT).
An increase in budget expenditures over budget receipts. A large budget deficit leads to growth of national debts and may become a catalyst for speeding up inflation. Caused by either significant expenditures, or small budget receipts. Therefore there are two solutions to the budget deficit problem-it is needed to decrease expenditures (primarily suffer social articles of expenditure-healthcare, education etc) and increase tax rates. In the first case the problem is solved at the expense of the low income population, in the second-at the expense of the tax payers. In both the first and second case resolving the problem of budget deficit touches the interests of the most influential groups, therefore the difficulty in resolving the problem. On the other hand, by failing to resolve the budget deficit problem, the government is pushing inflation levels up, and as a consequence-interest rate levels go up. And this contradicts the interests of the majority of the population (who are buyers of products and property based on credit loans) and the manufacturing sector.
An insignificant budget deficit or even complete absence of a deficit, implies that the tax rates are high or that the government expenditure levels are low (usually as a result of small military expenses). In the first case suffer tax payers, in the second-receivers of budget funds (social programs and the military-industrial complex). A low budget deficit leads to inflation level decease with all subsequent negative consequences. Because of the military-industrial lobby’s significant influence on the politics of just about all developed countries, it can be concluded that a low budget deficit is not advantageous for the governments of such countries.
An effective budget deficit is based on moderate inflation levels maintaining to the interests of all groups who are interested in the country’s budget. This indicator does not have significant market influence. Released monthly.
Indicator shows the amount of permits given for building new homes. Indicator is very sensitive to major interest rate changes, as one needs to take bank credit loans to build. This data, due to particularities of the real estate market, is subject to seasonal fluctuations. The building process is directly linked to population income rates. Therefore an increase in building permit amounts characterizes an improvement in the population welfare and healthy economy growth. This indicator has limited market influence. Indicator value increase has a positive influence on the national currency rate. Its value is published on the third week of every month at 1:30pm (GMT) simultaneously with the “Housing starts” indicator.
Wholesale store supplies. This indicator incorporates all produced and warehouse stored commodities. Its increase implies a weakening in product disposal, a negative economy state, which brings about currency weakening. Published at 1:30pm (GMT) on the 15th of every month. There is the following pattern: an increase in warehouse supplies for a period of several months may imply about the presence of standstill events in the economy. This indicator has limited market influence, although a steady trend in its dynamics does have significant market influence. A value increase of this indicator has a negative influence of the US dollar rate.
Indicator of a country’s manufacturing plants and equipment loaded in production. Ratio of overall production release to maximum production capacity. Characterizes the current economy state. For this indicator the optimal value is 81.5%. A lower value implies a weakening currency and economy and vice versa. Published at 2:15pm (GMT) on the 15th of every month (data for the previous month).
A value review that reflects business sentiment of businessmen regarding the trading sphere. This review does not have a direct connection to real economy development prospects. Indicator is taken into consideration by the market. Published at 2:15pm (GMT) on the 15th of every month (data for the previous month).
Economic review of the British Industrial Conference. A value review that reflects business sentiment of businessmen regarding the state of the production sector. This review does not have a direct connection to the real economy development prospects. Released monthly, taken into consideration by the market.
Data about chain store sales dynamics. Published at 3:00pm (GMT) on the 5th workday of the month (data for the previous two months).
Index of business activity of the Management Association of Chicago. Results of a survey of purchasing managers in the Chicago manufacturing sphere. This index touches the state of manufacturing orders, prices for the produce being manufactured and stored warehouse goods. Values below "45-50" imply slowdowns in economy growth rates. This index is carefully followed, as it is published not long before the release of the NAPM index. This index has significant market influence, as it can give a preview of what the national level NAPM indicator will be like. An increase value of this index leads to the US dollar rate growth. Its value is published on the last business-day of each month at 3:00pm (GMT).
Divided between construction spending for city housing, housing outside of the city boundaries, as well as the population’s expenditures for new construction. Due to this indicator’s strong fluctuation, its market influence is insignificant: only those tendencies that continue for the duration of 3 months or longer are reviewed. A value increase of this index has a positive influence of the national currency rate. Published at 3:00pm (GMT) on the first workday of the month. Indicator is very sensitive to changes of major interest rates, as it is necessary to take bank credit loans for construction. This data, due to particularities of the real estate market, is subject to seasonal fluctuations. The construction process is directly related to the population income state. Therefore an increase in construction volumes characterizes an improvement in social welfare and healthy economic growth.
Consumer expectation/sentiment index. Review of households, developed for evaluation of an individual’s predisposal to spend. Consists of 2 subindexes-consumer values of current conditions and future expectations (60% of the entire index value). Published at 3:00 pm (GMT) on the last Tuesday of the month (data for the previous month). This review attempts to evaluate consumer optimism levels. This index is calculated since 1967, when it equaled 100. Has limited market influence, as it may not reflect the true state of the economy, however, it is traditionally used to forecast employment rates and the overall economy state. A value increase of this index is a positive factor for national economy growth and leads to the US dollar rate growth.
Reflects the volume of loans to individuals through credit cards, hire purchase and personal loans in the USA. This is a consumer demand indicator. A high value implies that consumers are not afraid to borrow loans to satisfy their material needs. However, these values are frequently reviewed and are subject to large seasonal fluctuations. For example, the amount of consumer credit loans increases significantly prior the Christmas and New Year period. This index has limited market influence. Index value growth is advantageous for development of the national economy and leads to US dollar growth rate. Published on around the 7th of every month at 8:00 pm (GMT).
Indicator measures retail price changes of the consumer financial basket, with the exception of prices for new goods and services. Includes imported goods, ongoing demand services, (food, clothing, fuel, transport, medical services etc.) and taxes. Analysts often refer to the core CPI which does not include prices for foods and energy products. Indicator growth leads to a falling currency. In Great Britain this index is referred to as the Retail Price Index (RPI), fluctuations range from -0.5% äî +0.5%. Usually a deviation of 0.2 from the expected value is enough to cause a palpable market reaction. Published at 3:30pm (GMT), on the 13th of every month (data for the previous month).
CPI is frequently viewed as the main inflation level indicator. At the same time this indicator has several disadvantages. This is a measure of consumer prices for baskets of fundamental products and services in comparison to years 1993-1995, when index value for this period is taken as 100. An index value of 171.8 implies that the basket price in the current month is 71.8% higher than during the reference period. Strictly speaking, there are two versions of CPI: CPU-U and CPU-W. Traders and investors are primarily concerned with CPU-U, which covers around 80% of the country’s civil population. However, for calculation of a series of social and other payouts, the CPU-W index is usually referred to.
If Pi (0) is the price of a product or service i from the consumer basket for a given period of time (reference period), and Pi (t) is its price at time t (now), and wi is the value allotted to the given commodity in the consumer basket (the sum of all values equals 1), then the index can be calculated as I = wi Pi (t) / Pi (0).
The Bureau of Labor Statistics monthly determines the price of a reference consumer basket. Data is collected from 85 cities across the entire country and the mean value is established in accord to its relative importance. For determining the basket contents and its relative values, once every 10 years BLS researches the structure of consumer spending. Note that the CPI does not take into account the consumer tendency to buy cheaper products from lesser known brands, than those brands taken into account by the index. In addition, this index is based on reported prices and ignores all kinds of discounts. These factors’ influence is established at 0.5 - 1.5%. Nor does the index account for the rapidly improving quality of products and services. Establishing consumer basket content is not an easy task and is based on specialist statistical research because it must reflect the collection of consumed goods for a given country, price changes which would really indicate the direction of current economic processes without bias. In the USA, for example, such statistics cover around 19 000 retail trading firms and 57 000 households as a representative selection of about 80% of the country’s population. The consumer basket content is 44.1% commodities and 55.9% services. Keeping in mind that food and energy products are subject to the largest fluctuations (cycle as well as economic shock fluctuations), the CoreCPI indicator, whose consumer basket does not include food and energy services is delivered separately (CPI EX FOOD&ENERGY). Main characteristics of CPI index in the business cycle:
-highest volatility level takes place for prices of food products and energy services, price volatility is higher for products (where food and energy account for 50%), than for services (where food and energy does not exceed 6%).
-inflation in the services sphere comes about 6-9 months after inflation on the product market
-inflation has its own cycle, coming later with regard to the overall economy growth rate
Index growth rate may lead to a falling currency.
When consumers become concerned and unconfident about the future, they change the structure of their funds spending towards saving. When there is quite a number of such consumers, a decrease in consumer spending begins to affect the entire economy. There are several measures of consumer optimism. We will now review an index calculated by the Michigan State University, which is part of the index of leading economic indicators (LEI index). Statistics research, carried out by the Commerce Department, has shown that this index is correlated better than others with future economic activity.
The University of Michigan Sentiment Index is calculated via monthly telephone surveys of around 500 consumers. Each consumer is asked 5 questions regarding their financial status and their opinion about the current economy state (2 questions) and the upcoming economy changes (3 questions). A fraction of the respondents who have indicated an improvement of economy conditions is taken, from it is subtracted the fraction of those who have stated that it has become worse, and 100 is added to the received value.
A review is formed out of the responses to the first 2 questions reflecting the current state of the economy, out of the last 3-an index of consumer expectations. Therefore, expectations account for around 60% of the index. This review is released twice a month: on the second week (usually Friday) on around the 15th of the financial month (provisional) and 2 weeks later (final). Published at 3:00pm (GMT). An increase in the value of this index leads to US dollar rate growth.
Price-weighted average of the value of shares of companies included into the Dow Jones index. DJIA is the oldest and single most watched American significant stocks index. The index includes 30 shares quoted on the New York exchange fund. The Dow is the barometer for shares’ behaviour of the most prominent American companies. Index is based on calculating the growth rate (slowdown) of average price of the entire share set.
This is an indicator of consumer confidence, reflecting consumer expectations and ability to spend monetary funds. Its growth positively characterizes the state of the economy, helps to strengthen the currency. Its decrease leads to the opposite outcome. However its increase may be due to growth in the number of defense industry orders etc., therefore careful attention needs to be paid to the volume growth of all orders in all industry sectors. Published at 1:30pm (GMT) on the 26th of each month (data for the previous month).
The DGO index is a quite convenient leading indicator: because many manufacturers plan their production based on existing orders, a fall in the DGO index value precedes a fall in production volumes and vice versa. Usually the DGO index value begins to drop 6-8 months before the turn in the economic cycle from an uptrend to recession and several months before the end of a recession.
The US Census Bureau Department of Commerce calculates this index on the basis of a monthly review of about 5000 manufacturers. Considered are orders obligatorily to be carried out-confirmed by a contract or another document.
Includes salaries and unemployment benefits. It may serve as an indicator of the presence of inflation processes in the country’s economy. The employment cost index is one of the indicators carefully followed by the Federal Reserve System during conducting of its monetary policy (and this says a great deal). When expecting major interest rate increases, an increased value of this index leads to the US dollar rate growth. This index is used for the mid-term and long-term forecasts. Its value is published every quarter, after the 20th of the publication month at 1:30pm (GMT).
Real Estate dynamics data. This index reflects demand and supply in the real estate sector, it lags behind mortgage loans, is quite unstable and is reviewed from month to month. Analysts pay more attention to reviews about existing property sales. Published at 3:00pm (GMT), on the 25th of every month (data for the previous month). May provide a preview about consumer optimism (consumer confidence) and consumer capacity to purchase expensive goods. The construction process is directly connected with the population income rates. Therefore an increase in construction volumes characterizes a welfare improvement and healthy economy growth. This index has limited market influence. The value increase of this index has a positive influence on the national currency rate. The amount of newly sold homes has a tendency to increase when bank interests on property securities increase, an event that is related to the major interest rates in the country. This data, due to real estate market’s particularities, is subject to seasonal fluctuations. Therefore moving average is used for the New home sales index analysis.
Index reflects export price changes for the previous month, is an inflation indicator, has limited market influence. During expectations of an increase of major interest rates, increased value of this index will lead to US dollar rate growth. Published every month on around the 10th at 1:30pm (GMT) simultaneously with the “Import prices” indicator.
Consists of two indicators: orders for durable goods and non-durable goods. An increase in the given indicator implies possible production growh, as well as currency rate growth, and vice versa. Published at 3:00pm (GMT) on the first working day of the month (data for the previous 2 months).
Characterizes the ratio between government expenses and receipt. When the level of government gains exceeds the level of expenditures, there is a black ink balance. When the level of government expenditures exceeds receipt levels, there is a red ink balance. This indicator does not have significant market influence, it is usually used for long-term economy analysis. A budget deficit is reviewed in context with other indicators: the producer price index (PPI), consumer price index (CPI) and money aggregates (M1, M2, M3) etc. Its value is published on around the 20th of every month at 7:00pm (GMT).
One of the major macroeconomic indicators which involves a measurement of the value of goods and services produced in a country’s economy in a given period of time calculated in retail prices, although GDP does not include income of individuals and corporations who are working overseas. There exists a provisional and the final GDP value (in current prices, corrected taking into account inflation and deflation levels in reference year prices). Published at 1:30pm (GMT) on the 3rd or 4the week of the month (data for the previous quarter, with subsequent corrections) once a quarter with monthly adjustments on the last working Thursday or Friday.
4 major components are taken into account to calculate GDP value (C, or consumption), the volume of investments (I), Government purchases (G) and clean export, that is, full export minus full import (X-M, for eXport-iMport):
GDP = C + I + G + (X - M).
3 subclasses are usually established in the consumption (C) structure: consumption of products of prolonged use (more than 3 years: durable goods such as cars, furniture etc.), consumption of non-durable goods (less than 3 years: clothing, medication, food etc.) and services consumption.
As a percentage ratio, durable goods constitute around 15%, nondurables around 31%, and services around 54% of overall consumption in the USA. Overall, at the current time, C accounts for around 56% of GDP and is therefore its major component.
Investments (I) account for around 14% of GDP, government purchases (G)-social payouts, armament, percentages for government bonds etc.-for around 17%, and finally export (X-M) for about 13%. Note that for USA, it would have been more logical to name the last component of the GDP pure import, as this country imports considerably more products and services than exporting (that is, the X-M value is negative).
During GDP growth, currency rate also increases. GDP market influence is always significant. Sometimes it is not publicly disclosed, as the final values were not unexpected and were already taken into account by the market. But occasionally events may take a very sharp turn when data significantly different to expected forecasts is released, and this is a form of shock for the market. A recent example of this kind-publication of unexpectedly high GDP values for Japan for the first quarter of 1999.
GDP is calculated in the provisional form (in current prices) as well as in prices of the fixed period (Real GDP). Implicit Price Deflator measures the relationship between the estimated GDP to the Real GDP and is also published as one of the inflation indicators. Other than GDP, another similar indicator, the GNP, is used, which takes into account the overall product production and services providing by residents of a given country irrespective of where they are located, within country borders or overseas.
Preliminary GDP value. This indicator is the first step in three level GDP data published every quarter. They are released in the following order: advance-provisional (revised)-final. Its value is published every quarter after the 20th of the publication month at 1:30pm (GMT).
Gross domestic product in fixed prices-the indicator is an alternative to the consumer price index (CPI) for establishing the effect of inflation on the economy. Its advantage in comparison to the CPI is that it is calculated on the basis of a fixed products and services basket, and therefore enables to control any changes that take place as a result of consumer preference changes, and also takes into account the appearance of new goods and services. Its increase leads to an increase in interest rates. This is the relationship of the current GDP value to its reference value. It reflects the size of the inflation constituent in the GDP value. Published simultaneously with the GDP, has significant market influence. In the expectation of major interest rates increase, this indicator’s value increase leads to US dollar rate growth.
This is the update of the provisional GDP value. Usually the differences between the two are minimal, therefore values do not surprise the market. Published in the month after the provisional GDP after the 20th of the month at 1:30 (GMT).
Provisional value of the GDP. This is an updated review of the GDP advance indicator. Published in the month after publication of GDP advance after the 20th of the month at 1:30pm (GMT).
Export and import price difference. This index eventually loses its market influence, as capital flows have a greater significance than product flows. At the same time, an increase in import levels implies an increase in the consumption levels in the country, and export growth implies increased production levels. In Great Britain the trade balance is calculated separately for the countries that are not part of the European Union. Released monthly.
Index of worker demand. Characterizes the volume of published newspaper workers wanted ads. 1987 is the reference year, its value is taken to be 100. During analysis of this index, the moving average is used. If the moving average indicates a change in the index trend for the duration of several months, then this may be a sign of change on the employment market. This index may also provide a preview about possible changes of the economic situation in different regions of the country. Practically does not influence the market. Its influence is limited by the fact that only a limited number of major regional newspapers are taken into account. Its value is usually published on the last Thursday of the month at 3:00pm (GMT).
Start of housing construction and grant of permissions for construction. Start of housing construction is the number of development projects that appear every month. Grant of permission for construction is the amount of orders for start of excavation. For the USA, construction is a very significant constituent of the economy. Growth in construction activity is only possible when the economy is in a good condition and construction activity contributes to national currency strengthening. Published at 1:30 (GMT) on the 16th of the month (data for the previous month).
All economic turns since the end of World War II were anticipated by changes in the behaviour of this index. In a typical USA budget 17% covers transport expenses (purchase of cars and fuel) and 40%(!) for housing (down payments). Both items of expense are sensitive to interest rate levels. Many other purchases of durable goods, such as furniture, consumer electronics etc. are connected with housing expenses. Therefore a consistent drop in housing construction levels is a strong sign of a weakening (possibly recessive) economy, and vice versa, this indicator value’s increase implies growth in economic activity.
The Bureau of Census of the Department of Commerce collects data about private sector construction.
Data about the amount of granted permits is collected from 19000 organizations that have a right to grant such permits and is seen as an indicator for the amount of construction processes that will begin in the nearest future. This amount is a good leading indicator of economic activity and is included in the LEI index.
Performance of the Head of the American Federal Reserve System (currently it is Alan Greenspan) in front of two bank committees of the US Congress. This performance takes place twice a year: in winter and summer. Two Congress cabinets (The Senate and the House) are the first to hear the report in turns. The report sheds light on the new plans and goals of the Federal Reserve System during adoption of a financial policy. All market participants carefully follow this report and try to find a hint as to the possible FRS actions during future major interest rate changes. This performance has significant market influence, it is one of the most important and significant market events.
Review of the German IFO research institute. This review evaluates the level of business activity in the country. The indicator’s value can change in the 80 to 120 range, 100 signifies the level of activity in 1991. Released monthly. Has significant market influence.
This index reflects import price changes for a month, it is an inflation indicator. Because during calculation of consumer price index (CPI) prices for imported goods and services are taken into account, this value characterizes the contribution of import prices to the overall picture of changes in retail prices on the goods and services basket. This index has limited market influence. In the expectation of major interest rates increase, an increase in this index value leads to an increase in the US dollar rate. Published every month, on around the 10th, at 1:30pm (GMT) simultaneously with the “Export prices” index.
Industrial output volume. Incorporates the volume of manufacturing output, as well as accounting for output in such spheres as mining and processing of mineral ores and the municipal economy. This is an economic growth indicator, but not a defining indicator for the direction of economy growth, as more than 60% of the GDP at the current time is accounted for by the services industry. Released monthly, taken into consideration by the market.
Shows overall national factory industrial production releases, as well as industrial production of mining plants, overall municipal services volume etc. An increase in the value of this index contributes to currency growth. Published at 2:15 (GMT) on the 15th of every month (data for the previous month).
Industrial production constitutes around 40% of the US economy. There is a relatively strong correlation between production levels and GDP value. One of the advantages of this indicator is that it measures production volume, not its monetary equivalent.
Index is expressed by the Board of Governors of the Federal Reserve System in percentages with reference to year 1992. Usually its relative change to the previous month is published in the media.
In US statistics, accounting for industrial production is by way of evaluating enterprises dispersed into 255 industry sectors. With reference to 1992 statistics, industrial production made up 84.6% of the entire production sector, mining constituted 7.3% and energy supply accounted for 8.1%. FED also calculates its own index, the production diffusion index, which reflects the percentage of sectors from the list of 255, where production levels have risen during the past month.
The IP index is a comprehensive and reliable reference point for following the business cycle. According to US statistics (yrs 1948-1922), industrial production in the recession stage fell on average at the rate of 0.8% per month, the increase during recovery was 0.9% per month, and during the expansion stage, around 0.4%. The Capacity Utilization, CAPU index is a relationship between the overall industrial output to the size of the net production (potential production volume) per sector. This index has important significance for the currency market due to its strong link to business cycle dynamics, thanks to which during difficult times of awaiting for changes in the central bank policies, it becomes and additional reference point, hinting at future central bank decisions.
It is known that the optimal economy functioning regime corresponds to the CAPU level of around 81.5%, significant deviations from the optimal level imply disturbance of balance, and based on this information it is possible to identify upcoming recession and recovery periods. For example, a high CAPU value of > 85% may indicate economy overheating, after which inevitably inflation levels will increase; therefore such CAPU values may forecast beforehand the changes in central bank monetary policies (official interest level increases)
The CAPU index is published monthly simultaneously with the industrial production data. As a rule, it has a greater value during recession periods (average of 80.3%), than during recovery stages (average of 78.8%), as during early recovery periods low utilization ratio of industrial capacity is characteristic. During expansion stage, on average CAPU is 84% and has a maximum of 85.4% (a peak of 89.2% has been observed).
Shows the level of change in industrial production volumes in the country. Provisional index value is released at the end of each month, final value is published two weeks later. This index’s value increase leads to national currency rate growth. Has significant market influence.
Inflation index: index of consumer prices (CPI) and retail price index (RPI). During inflation growth, currency rate usually falls;
High inflation levels are bad because high interest rates inevitable during increased inflation, lower production effectiveness and determine capital redistribution from production spheres to brokers (trade and financial institutions). Industrial groups will be against high inflation levels.
Low inflation levels or full absence of inflation are bad, as the brokers’ interests begin to suffer. Trade comes to a standstill as nobody wants to buy products whose prices virtually do not increase, or even drop. Financial brokers suffer because of low interest rates.
Optimal inflation value is good, as due to a stable highly effective production sector, there remain opportunities for profitable business deals for the brokers as well, especially for financial institutions.
Not many economic indicators can compare in significance for currency markets as inflation indicators. Traders carefully follow price behaviour, as central banks use increasing interest rates as a means of fighting inflation, and this strengthens the currency rate. Moreover, inflation levels change true interest rate values. Government bond markets are therefore very sensitive to inflation data, and during high inflation intervals, redistribution of financial streams caused by these market movements, will inevitably affect currency rates.
As with other indicators, the currency markets’ reaction to inflation depends on the business-cycle stage at which the economy is at presently. If during economy growth there appear signs of inflation, the central bank may take preventative measures by somewhat increasing the official interest rate. In this case the main influence factor for the currency market will be the increased percentage differential in favour of the given currency, and the currency’s rate will increase. A completely different picture will emerge, when inflation will begin to speed up on the highest business-cycle level, during economy growth slowdown, threatening with a downfall. In this case, in response to inflation growth, the central bank will also increase interest rates with the aim of slowing down activity, but the market’s reaction will be completely the opposite. Understanding that the economy is headed for a downfall related to the inevitable share rate fall, a decrease in investment volumes and problems with external trade, traders will begin to sell this currency and other related assets, therefore the result will be a falling currency rate.
No other economic or financial indicator has such significance for currency markets as the official interest rates. The Interest Rate Differential for two currencies is the key factor that directly determines the relative appeal of a currency pair, and therefore possible demand for each currency. The higher the interest rate for the given currency in comparison to other currencies (large interest rate differential), the more foreign investors will be wanting to buy the given currency, in order to deposit funds with a large interest rate. And because interest rates are always closely interconnected, high bank market interest rates imply high rates for government bonds, and also high yield on the more risky asset fund bonds. Therefore high interest rates make the given currency an attractive investment instrument, and therefore, demand for this currency on the market increases, as does the currency rate.
The overall interest rate influence on currency rate is quite unambiguous: the higher the interest rates for a given currency, the higher this currency’s exchange rate. But there are many other conditions that make accounting for interest rates unobvious and even quite difficult. It is important to consider not only the interest rates, but also real interest rates taking inflation into account, because there is a strong connection between the currency market and the government security market (instruments with a fixed yield) which are very sensitive to inflation. If inflation in a given country begins to increase at high rates, this devalues government bonds, as the paid out yield on them is fixed and preliminarily established, and the inflation may simply eat away this yield. At the first signs of a high inflation rate, government bond markets become very nervous, and if foreign investors will begin to dispose off bonds, then there will be an excess of this currency on the FOREX market, as a result its rate will fall.
Secondly, the market lives in the expectation of important events and prepares for them, instead of by just reacting to events that already took place. If a certain opinion is formed that the interest rates for a given currency will be increased, then dealers will begin to increase its rate in the expectation of this event. And the market may continue to function based on this optimistic expectation with regard to the given currency, and as a result, a currency uptrend will form. When the interest rates will be increased in reality, the currency will already be overbought, and because the pressure factor for its increase has already become irrelevant after real interest rate increase, the first reaction to their real increase may be a currency fall, that is, the very opposite reaction. And this is more likely to happen for the reason that such a downfall provides a good opportunity to open new long currency positions (that is, traders will buy the currency).
Presents the relationship between the net product prices exported out of a given country, to the net product prices imported onto the territory of the country, that is, the export/import difference. If the net price for exported products exceeds the net price of imported ones, then the trade balance is positive, in the reverse situation this index is negative. A positive value, or a decrease in negative value, are advantageous factors for national currency growth. Has significant market influence. Published on the third week of every month (usually on Thursday) at 1:30pm (GMT).
Published at 1:30pm (GMT) every Thursday (data for the week that had ended on the previous Saturday). These values do not always accurately reflect the true state of events: they are sometimes distorted by factors such as national or local holidays. This indicator may hint at what the “Nonfarm payrolls” index will be like. For example, if in the duration of the month the “Jobless claims” indicator value sequentially decreases, then the probability is high that the “Nonfarm payrolls” value will be high. Has limited market influence. A decrease in the amount of jobless claims is an advantageous factor for the US dollar rate growth.
The leading index is a weighted average value of 13 major indicators. Used for determining the upcoming economy state. The coincident index is made up of 11 indicators and is intended to evaluate the current state of the economy (50% indicator value is taken to be as the zero value). Released monthly, has little market influence.
The LEI index is formed from 10 provisional series and is developed especially to forecast changes in global economic activity. It is historically proven that maximum and minimum LEI values precede economic turns. As a rule, 3 consecutive changes of the LEI index in the same direction are seen as a fairly strong signal. For example monthly values of -0.5%, -1% and -0.7% indicate a possible beginning of a recession. Note that this is a necessary, but insufficient condition: for example, in the interval between 1952 and 1988 LEI predicted 10 recessions, but in reality only 7 took place. It is also noted, that the LEI index functions during periods of maximal economic activity, rather than during significant activity slowdowns. The index’s turn takes place on average 10 months before the economy change from economic uptrend to recession and 1-2 months before a turn in the opposite direction.
Components of the LEI index were chosen based on their economic value, statistical adequacy and possibility of operative measurement:
The University of Michigan's Consumer Expectations Index. This index is based on the idea that the key motive in economics is the expectation of future profits. In expectation of increases in profit levels companies widen their range of products and services, invest in new factories and equipment and correspondingly all this activity slows down when a profit fall is forecast. Therefore the index is adjusted to cover all major spheres and indicators of business activity: employment rates, production and profit, consumption, trade, investments, stock, prices, financial loans. The American LEI index is published monthly closer toward the end of the month.
Orders for engineering industry produce. Indicator reflects firm capital investments and business activity. Calculated based on assessments of more than 300 industrial manufacturers. Released monthly. Has significant market influence.
Indicator shows change of order amounts for produce of German manufacturers. Reflects the country’s economic development prospects. Released monthly. Taken into consideration by the market.
Volume of production released by the manufacturing industry, expressed in prices. This is an indicator of economic growth. Does not have significant market influence, as the manufacturing industry contributes 20% of GDP value according to recent values. Released monthly.
Shows the changes in production levels released by the manufacturing industry. Released monthly, taken into consideration by the market.
Index of consumer sentiment of Michigan University consumers. Consumer survey regarding confidence levels in the current economic situation. Survey is conducted by employees of the Michigan University of the USA. Results are released twice a month: on the second week of the month (usually on Friday) on around the 15th of the month (provisional), and two weeks later (final). Published at 3:00pm (GMT). This indicator is nothing other than a reflection of consumer desire to spend their money. Has limited market influence, an increase in the value of this index leads to US dollar rate growth.
Money supply in a country expressed with the money aggregate M0=cash, M1=cheque investments, M2=M1+term deposits less than $100 000 USD, M3=M2+term deposits larger than $100 000 USD, M4=total money aggregate. Published at 9:30 (GMT) every Thursday (data for the week that had ended two Mondays ago).
Increase in money supply as a rule, is followed by a drop in the national currency rate. Although sometimes data about increases in money supply leads to expectations of an increase in interest rates, and as a result, to an increase in currency rate;
The amount of money in Money Supply is one of the intrinsic factors that form the currency rate. An excess of one currency will create an increased demand for it on the international currency market and will lead to a decrease in its rate compared to other currencies. Therefore, currency deficits, when there is demand for such a currency, lead to an increase in its rate.
Indexes that measure the amount of money in use are so called Monetary Aggregates, indexes that account for different types of money and characterize its composition (structure of money supply). The actual monetary aggregates are defined somewhat differently in different countries, but the overall essence remains quite similar. As usually we will consider the American bank system version here, where data for four monetary aggregates is formed:
- M0=bank notes and coins in use;
- M1=cash in use beyond the bank premises, travel cheques, demand deposits, other cheque deposits;
- M2=M1+non-cheque savings deposits, bank deposits with fixed period, one-day REPO operations, one-day dollar deposits of US residents, funds in mutual funds;
- M3=M2+short-term government bonds, bank deposits with fixed period, one-day REPO operations, euro/dollar deposits of US residents in foreign American bank branches.
Monetary aggregate M4 incorporates the volume of cash in use, the overall loan value given out by banks, and also the value of government loans. M4 is considered to be a good inflation level indicator.
Another, more widely used monetary aggregate exists in the USA, but it is considered that the main indicator strongly correlated with currency markets is M2, therefore we won’t go into further detail.
Influence of monetary aggregate data on currency cycles is evaluated primarily through its link to economic cycle stages. Behaviour of different monetary aggregates in the economic cycle is quite similar: they all show maximum growth rates before the beginning of recession, and minimal growth rates at the end of recession. For this reason M2, for example, is included into the aggregate LEI index. All aggregates experience the most growth during recovery stage; on average M2 has a similar growth rate during recession stage and recovery stage.
Incorporates the volume of cash in use, funds on cheque deposits, deposits with outset levels of lower than 4 years. Considered by the Bundesbank and European Central Bank as one of the most important inflation indicators. Usually the maximum accepted value of the indicator is established (thus establishing acceptable inflation level), and in case the indicator exceeds this value, interest rates increase usually takes place. Released monthly, taken into consideration by the market.
Money Supply M4 More frequently the index of money supply change is used. Incorporates the volume of cash in use, the overall amount of loans given out by banks, as well as government loans. M4 is considered to be a good indicator of inflation levels. Released monthly, taken into consideration by the market.
Results of a manufacturing sphere purchasing managers’ survey. This index is used to evaluate changes in the sphere of new production orders, the volume of industrial production, employment, and also amount of supply orders and supplier efficiency. Values below “45-50” are indicators of slowdown in economic growth rates. Often this index’s value is influenced by emotion factors, rather than the actual business activity state. California is not included into this index. Because the volume of industrial production is not automatically a source of consumer demand, this indicator is approached with caution. Published on the first business day of every month at 3:00pm (GMT). Has limited market influence. An increase in the value of this index leads to US dollar rate growth.
Results of a service sphere purchasing managers’ survey that are used to evaluate changes in this industry sector. Values below "45-50" are indicators of a slowdown in economic growth rates. Often this index value is influenced by emotion factors, rather than the actual business activity state. The process of services consumption tends to change at a relatively constant rate, therefore sharp changes in this index value are caused precisely by emotion factors, and this is paid extra attention during analysis of this index. Its value is published on the first days of the month at 3:00pm (GMT) one day after publication of the National Association of Purchasing Managers’ index (NAPM). Has limited market influence. An increase in the value of this index is advantageous for US dollar rate growth.
Off-exchange index. The National Association of stock dealers calculates a series of indexes that represent the off-exchange turnover, as well as the securities of different sphere corporations. The main index is NASDAQ, which includes the shares of 3500 corporations (other than those quoted on the exchange). This index is an indicator whose value is defined by the market value of its components. It was first calculated in February 1971.
The amount of financial loans that individuals made in the previous month. A high figure may indicate that the economy is overheating, as consumers borrow more than is necessary to sustain a good standard of living. Released monthly, has limited market influence.
Value shows the number of 1-family homes sold or made for sale, in the duration of a year.
This amount has a tendency to increase when the interest rate loans on property securities increase, an interest rate that is related to major interest rates in the country. Due to real estate market particularities, this data is subject to seasonal fluctuations. Therefore the moving average is used during “New home sales” index analysis. This index has limited market influence, an increase in the value of this index has positive influence on the national currency rate. Published on the first days of every month at 3:00pm (GMT).
The number of new work places created outside of agricultural economy sectors during a month. Payroll is the payment record based on which employees receive their salaries. This is a very strong indicator that reflects employment changes in the country. An increase of this index value characterizes increased employment levels and leads to an increase in the US dollar rate. This is referred to as “the indicator that moves markets”. There is an empirical rule that an increase of its value by 200 000 is equal to a 3% increase in GDP. Published on the first Friday of every month at 1:30pm (GMT).
This index’s influence on currency rate is the same as the trading balance deficit’s influence.
The functioning of the currency rate and rate dynamics are closely connected with international cooperation in the trade sphere, with cultural exchanges, international cooperation, with international investments. In the financial plan, the place taken by a given country in the global structure is expressed by its payment balance, which is the result of all international transactions of this country’s residents. The Balance of Payments therefore, fixes the interrelation of all major types of international correlation: international trade, capital movements, international services (tourism etc.), transnational payments.
In the long-term, competitiveness levels of a given country are determined by its national resources, its industrial base, professional qualifications of the workforce, price structure. Ultimately, an ambiguous character of the relationship between these factors, made even more difficult by current political processes, makes the link of the actual payment balance with the dynamics of short-term currency rates not so evident, as for its analysis to give the trader solid grounds for making a decision. Therefore the currency market usually concentrates on the major constituent of the payment balance: the trade balance.
Employment from the employer’s point of view. Every month a special branch of the Department of Labor, called the Bureau of Labor Statistics, BLS, gathers data and forms the so-called Establishment survey –the result of surveying enterprises about their average workweek length, salary rates, amount of overtime etc. and the Household survey-result of a population survey.
In this way the payroll employment statistics index is formed, an index that takes into account the average workweek length, amount of overtime worked and salary rates. From a first glance, one can consider that it reflects the amount of funds paid out by enterprises in the form of labour payments. Published in the form of relative change compared to the previous month.
The employment report is possibly the strongest market engine. This can be explained by two reasons. Firstly, it is very difficult to forecast population employment rates, therefore announced values often differ from expected ones and require an immediate correction. Secondly, this data accurately reflects the current state of the economy. Despite the fact that it is often corrected, investors view it as an immediate guide to action.
Whether the announced economic news are “good” or “bad” primarily depends on changes in payrolls. The workweek length and changes in hourly work payments are also taken into consideration.
Data regarding citizen incomes. The sum of all incomes from all sources, including salary, rental profits, government subsidies, dividend profit etc. Supplementary index of future consumer demand. Reviewed together with another index, the “Personal Spending” index. An increase in the value of the “Personal Income” index contributes to currency rate growth. Published at 1:30pm (GMT) on the first workday of the month (data for the 2 previous months).
Data about dynamics of citizen expenditures. Index reflects change in funds spending for personal needs. Has limited market influence. Published after the 20th of every month at 1:30pm (GMT) simultaneously with the “Personal Income” index. Index is made up of three constituents: expenditures for durable goods, short-term use products and services. The “Retail Sales” index provides an overview about durable and non-durable goods purchases. The rate of service use changes relatively constantly, therefore this index’s value can often be predicted. Therefore, only a significant deviation of this index from the forecast values can have a significant influence on the national currency rate. An increase in this index’s value is a positive factor for national economy growth and leads to the US dollar rate growth.
Index of business activity of the Federal Reserve Bank of Philadelphia. The result of a survey of Philadelphia manufactures about their sentiment regarding the current market situation. Values below 0 indicate factory-sector economy growth rate slowdown. The index is published on the third Thursday of each month at 3:00pm (GMT). This index has limited market influence, it is closely followed, as it is published before release of the NAPM (National Purchasing Managers’ Index) and may provide a preview of what the national level business activity indicator will be like. Philadelphia Fed Index’s value increase leads to US dollar rate growth.
Evaluates average price changes established by manufacturers during all production stages; does not include imported products, services and taxes. Not the separate index value is monitored, but its change during a specified period of time. This index is an upcoming inflation indicator. Special attention should be paid to the core of the index, where foods and energy resources are excluded. Published at 1:30pm (GMT) on the 11th of every month (data for the previous month).
Contribution of major product groups to PPI is roughly as follows:
Consumer products, mainly cars-40%
Fuel and utilities-14%
Remaining 23% account for all kinds of furnishment, cars (which, as a result, are included twice, as a consumer product and means of production.) In the report, other than the index of completed produce, also is included the index for materials and incomplete produce (for example, integrated circuits or separate mechanical parts).
Markets usually react to the finished product prices, the more volatile of which are foods and energy resources.
Typical PPI properties in the economic cycle:
- More volatile than CPI (foods and energy account for around 36% compared to about 23% in CPI);
- Has its own cycle that is late in comparison to the overall economic cycle, analogously to the CPI cycle;
- Peak PPI values (expressed as per cent per annum) are usually 3-6 months late from overall economic activity peaks, and its minimums are 9 months behind economic activity minimums;
- Usually PPI and CPI are reached in the same quarter and are almost always no longer than a quarter apart.
Defined as a change in price levels for component parts and semi-manufactured goods in the manufacturing industry (price increase during entry may not reflect in the inflation index, as a lowering in expenditures is possible during the production process.) Strong inflation indicator. A part is usually selected from the overall indicator value that does not incorporate prices for products, alcohol, tobacco goods and fuel (these products’ prices are considered to be very volatile). Released monthly, taken into consideration by the market.
Defined as change in the level of output prices for products in the manufacturing industry. Strong inflation indicator. Reflects inflation pressure on the economy on the part of the manufacturers (price increase on exit may not reflect in the inflation index, as a lowering of expenditures in the trading sphere is possible). A part is usually selected from the overall indicator value that does not account for prices of foods, alcohol, tobacco goods and fuel (these products’ prices are considered to be very volatile.) Release monthly, has limited market influence.
Published at 1:30pm (GMT), on the 7th of the second month in the quarter (data for the previous quarter).
A production drop may lead to a drop in this index rate.
Index shows the change in released production volumes per worker.
Worker productivity is a very important indicator for economy analysis.
Has significant market influence, although it must be carefully followed, as from time to time it may lead to error. For example, a decrease in the number of production employees during economy standstill leads to an increase in productivity. This may also happen as a result of worker strikes. An increase in the value of this index is a positive factor for national economy growth and leads to an increase in the US dollar rate.
Published every quarter, before the 10th of the month that follows the period of inquiry.
Business activity index, reflects levels of business activity of the industrial sector in Germany, Italy, Great Britain and other countries. Indicators based on the method of constructing the so-called diffuse indexes, have recently become very popular in economics statistics. Such indexes, in their essence are indexes of business optimism levels of business participants, and are regularly published under the name of PMI in the USA, England and Germany, where they are created by relevant business associations; they are used to evaluate the direction of public opinion, as well as to measure the dynamics of objective indexes. In Japan an analogous TANKAN index is preferred by the Central Bank of Japan as an instrument of dynamics analysis of economic processes for making decisions in the monetary policy sphere.
Diffuse indexes, in contrast to many other indicators of socio-economic statistics are purely subjective indexes. They do not measure production volumes, amount of orders, income etc., but they are merely a reflection of how economic process participants perceive current changes-are they for the better (in their opinion), or they will make things worse. Despite such subjectivity, or even thanks to it, these indexes have very strong forecasting properties and they are leading indicators strongly correlated with major economic cycle parameters.
A diffuse index is constructed based on survey results of a large number of businessmen who answer a question of the type “Have the conditions for running your business improved in the sense of new orders, prices, employment market, order execution deadlines, new export orders etc.”, and the respondent has three options to choose from: “yes”, “no”, “without change”. The diffuse index value is calculated for a particular question as the sum of
DI = (% who have replied “yes”)+0.5*(%who have replied “without change”)
Having calculated diffuse indexes for every question, the mean value is then established, creating composite mean indexes such as PMI and TANKAN. They are quite effective in following the dynamics of an economic cycle, and are one of the LEI indexes: the start of an index value decrease after a period of growth forecasts the transition of the business cycle from growth stage (expansion) to recession, and a turn upwards after a fallen index value forecasts the recovery stage. Strong correlation of diffuse indexes with economic dynamics, evaluated based on longstanding statistical data enables to use them for forecasting future GDP values (at least a quarter ahead).
Almost all members of the Big Seven publish such indexes these days, for example, in England they are released since 1991. The German PMI is released since 1998, it incorporates a review of 350 corporations based on the following five questions: output, new orders, employment, supplier’s delivery times, stocks of goods purchases. Since 1999 a joint PMI covering the entire European region is released: the index covers 11 countries with the common currency, the euro (EU PMI). The strongest statistical grasp of business activity (responses of 34 000 participants) is that of the American PMI index by the National Association of Purchasing Managers, an index that is released since 1931; only the number of employee staff who put together these statistics comprises 300 people.
We will review the structure and properties of a business optimism index in detail based on the American Purchasing Managers' Index (PMI), NAPM. A review of the American NAPM association that is at the basis of the PMI index, includes questions the survey participant is required to respond to: whether their business conditions have changed in the previous month for the better (possible answers: “higher”, for the better, “lower”, for the worse, or “unchanged”) in relation to the following factors:
- Commodity prices
- Vendor deliveries
- New orders from customers
- New export and import orders
- Order backlogs (this point was introduced in 1993 based on the proposal of the current FRS head, Alan Greenspan.)
A diffuse index is calculated based on each survey point (percentage of those who have responded “higher” plus half a per cent of those who have answered “unchanged”) and then on the basis of this value a weighted total is obtained, that is the weighted PMI index; in 1994 the PMI formula was as follows:
PMI = 0.30 õ DI(new orders) + 0.25 õ DI(production) + 0,20 õ DI(employment) + + 0.15 õ DI(deliveries) + 0.10 õ DI(inventories)
The main property of PMI is that it is a leading business cycle indicator. For its interpretation a series of major indicator levels are selected:
-cycle maximum and cycle minimum;
If after a period of growth PMI turns down, this forecasts a downturn of the business cycle. The reverse, if after a PMI fall, having reached a minimum, the index turns up, then this is a sign of upcoming recovery. According to 40year long US statistics, PMI predicts the maximum growth cycles on average 7 months before they begin, and minimum growth cycles 3 months before they begin. A PMI drop lower than 50 forecasts recession on average 2 months before it begins, and a drop below 44 always predicts absolute lowering of economic activity. Minimums that PMI had reached during recession stages were on average 35, and after a turn from the minimum, on average in 4 months this index reached a level of 44, which always corresponded to the economic cycle minimum. Overall PMI accurately forecasts turning points of growth cycles (that is cycle changes during economy growth), but it is difficult to make out the growth cycle from the overall global economic cycle using this index (according to post-war US statistics, 82% of all business cycle peaks are followed by a recession, that is, growth cycles are a relatively rare event).
Statistical research proves a very strong correlation between PMI and economic parameters such as industrial production and the GDP. For example, based on year 1980-1992 data it was possible to accurately produce a formula relating the PMI value with the industrial production index in two months:
IP = 0.52 õ PMI[-2] - 23.4;
This formula shows that PMI value of 45.9 corresponds to stable industrial output (1P=0). An analogous formula shows the relationship between PMI with the GDP index in a quarter:
GDP = 0.317 õ PMI[-1] - 13.9.
It is also noted that diffuse indexes of prices (DI prices) are leading indicators of turning points in the inflation cycle. It must also be taken into account that when reading business optimism index values, one may also encounter negative values, although negative values are deliberately limited by the 0.100 range. This is related to the fact that certain statistical organizations have a somewhat different approach to defining the index, precisely, they take the NPR (net percentage rising) which equals the percentage of survey participants who have responded “higher” minus the percentage of those who said “lower’, that is linked to the DI with an evident correlation: NPR = 2 õ (DI - 50).
Indexes of PMI type are released on a monthly basis and published on the first working day of the month. An exception is the Japanese TANKAN, released quarterly. The Japanese index is also an exception in the sense that it is not produced by a non-professional business association, like in other countries, but by a government body, the Central Bank, and is an officially announced reference point for decision making regarding monetary policy. Therefore publication of the TANKAN index is always an important even on currency markets.
Index is calculated taking inflation into account (cleared of inflation influence). In order to eliminate the influence of inflation, calculation is carried out in relation to a reference year, 1982. Expressed as an absolute value and as an index with regard to the previously reviewed period. It may serve as an indicator of the developments in inflation processes related to increased workforce cost. Has limited market influence. In the expectation of major interest rate increases, an increase in this index value may lead to US dollar rate growth. Published in the middle of every month at 1:30pm (GMT) simultaneously with the CPI index.
Weekly review of retail Redbook sales. Investigates volumes of large supermarket retail sales. Published every week on Tuesday at 3:30pm (GMT). First review of the month (on the first Tuesday of the month) compares the first week of the current month with the first week of the previous month, the second review compares the first two weeks of the current month with the first two weeks of the previous month etc. Therefore the full picture of the review is only formed after publication of the last month’s review (on the last Tuesday). Practically has no market influence. This can be explained by the fact that values are considerably dispersed (volatile) and the fact that a limited number of stores is included in the review.
Determines price change levels for consumer basket products. RPI serves as an Inflation level index without taking into account interest rate payments for credit loans for obtaining real estate property (RPI-X). The RPI, calculated by a single formula for comparison with analogous indexes in other countries is referred to as harmonized (HICP). If index rate growth is higher than the planned value, then usually the Bank of England increases interest rates. Released monthly. Has significant market influence.
A consumption level indicator. If consumption levels are higher than production levels, this usually leads to inflation growth. It must be noted that the monthly retail sales index is a very volatile measure. Mean value for the three previous months gives a better representation of the economic state. Released monthly, taken into consideration by the market.
Indicator reflects sales level changes. These statistics cover international stores and supermarkets. Shows level of consumer spending and demand. Released monthly, has weak market influence.
Index shows changes in retail sales volume. Retail sales volumes is one of the indexes of consumer spending; therefore as a consumer demand and consumer confidence indicator, it may serve as a reference point for the currency market during turning points of the economic cycle. Such indicators are especially significant for following the USA economy, as consumer demand is its main driving force. If a consumer has a large disposable income, then more products will be produced and also imported.
This indicator is divided into “car sales” and “sales of everything other than cars”. As car sale amounts are very volatile, the more accurate data is in the index part that does not account for car sales. An increase in volume of retail sales is a positive factor for national economy development and leads to an increase in national currency rate. Has limited market influence (mainly for the middle and long-term plans).
Index characterizes consumer demand strength. Its growth implies an increase in production, a strengthening of the economy and the currency. Published at 1:30pm (GMT) on the 13th day of the month (data for the previous month).
RS is the first announced consumer spending indicator. It is important as it is incorporated (represented as the letter C) into the formula for calculating the GDP: GDP= C + I + G + X – M, where the symbol C accounts for about 2/3 of the entire GDP. The more important information in the report about retail sales is probably the percentage change in sales of consumer products, with the exception of cars. This part of consumer spending accounts for 40% of the overall index value. Note two disadvantages of RS: firstly this data reflects only expenses for purchasing products, ignoring purchasing services; secondly, data about population expenses is very volatile, it is difficult to forecast, it is frequently reviewed. Data is collected monthly by a special branch of the Department of Commerce called the U.S. Census Bureau by way of randomly surveying retail trade organizations of all sizes across the entire country.
This index is published by the independent company “Standard and Poor’s”. It consists of two versions: based on the shares of 500 corporations and 100 corporations. S&P - 500 is a weighted market value index for the shares of 500 corporations that are represented in the following proportions: 400 industrial corporations, 20 transport corporations, 40 financial and 40 communication firms. This index mostly includes the shares of corporations registered on the New-York exchange fund, although the shares of firms quoted on the American stock exchange and in the over-the-counter turnover are also included. Index represents around 80% of market value of all releases quoted on the New-York exchange fund. This index is considered to be more complex in comparison to the Dow-Jones index, but it is also considered to be more accurate, as it includes the shares of a greater number of corporations, and each corporation’s shares are weighed based on the price of all shares in the hands of shareholders. Futures and options for this index are sold on the Chicago commodity exchange.
Quarterly economic review, published by the research statistics department of the Bank of Japan. Review is based on evaluations of more than 8000 corporations, firms and institutions based on the following economic parameters:
- Business conducting conditions;
- Production and sales;
- Demand and proposal, price levels;
- Direct investments;
- Taxation conditions
Tankan is the most important Japanese indicator.
Properties of business optimism indexes explain why markets so eagerly await their publication, and also demonstrate that collection and analysis of PMI index statistics may provide a lot of useful information for the trader.
Difference between export and import volumes of a country expressed in US dollars, with seasonal adjustments. Data about the difference between export and import volumes is collected by the U.S. Census Bureau every month. A decrease in the trading deficit of the USA is usually good news for dollar holders: buyers of American export are forced to buy dollars, and import vendors-to sell them. The bond market situation is somewhat more complex: during deficit decrease, bond holders usually prefer to see an import drop, rather than an export increase. The reason for this is in their ever-present fear of a strong economy and high inflation.
The Merchandise Trade Balance, ÒÂ, is the difference between aggregate export and import products for a given country. This trade balance reflects, first of all, the competitiveness level of a given country before overseas consumers. It is closely related to the national currency rate as a large positive trade balance (more export than import) implies an inflow of foreign currency into the country which raises the local currency rate. A negative trade balance value (trade balance deficit, more import than export), implies low competitiveness levels of products of the given country on external markets, this leads to an increase in external debts and a national currency drop.
On the other hand, the actual national currency rate changes influence the result of international trade, and therefore the trade balance. With a low national currency rate, the products of this country receive an additional advantage before their competitors on external markets, which leads to an increase in export. The reverse happens, because of an increase in international currency rate: the prices of national products on external markets will increase, which will lead to their displacement by cheaper products from other countries. It is easy to see therefore, that many central bank actions regarding lowering the national currency are linked to precisely striving to provide competitive advantages to national exporters. In the first half of 1999 this was one of the most important factors for weakening of the British pound, and also the reason for numerous interventions of the Bank of Japan, aiming to prevent a strong preliminary strengthening of the Yen against the dollar.
Trade balance data is published monthly, usually on the 3rd week of the month at 1:30pm (GMT). The data is presented with seasonal adjustments, both for the nominal and fixed prices. The results of the trade are grouped into six major product categories (foods, materials and warehouse inventory, consumer products, cars, production means, other products) and into categories for trade with different countries. Usually the currency market follows the overall trade balance of a country, not the separate two-way trade balances with different countries. But there are exceptions: the trade balance of USA with Japan is long since an object of a separate review because of the traditionally large deficit size and the generated political problems, trade sanctions etc.
As an example of interplay of exchange rates and the trade balance, serve the coordinated actions of the leaders of five major industrial states: the historical Plaza Accord agreement, New-York, September 1985. During this time the US dollar was on a record post-war high level against Japanese currencies and the Japanese Yen. American exporters were at a disadvantage because of their products’ high prices on international markets. As a means of leveling the trade balance dollar devaluation was chosen, which was done by changing relevant interest rates. However the effect of a significant dollar rate decrease (against the Yen and the German mark the US dollar decreased by two at the time) on the trade balance turned out to be minimal: somewhat having stabilized towards 1990, the trade balance fell to previous levels in 1993, as import into USA at the time was increasing at superior rates.
In reality, despite the evident importance of trade data, its interpretation from the viewpoint of currency rates is not simple. Export and import volumes in relation to their economic value are not viewed as equitable. Export has a more direct influence on the country’s economic growth; therefore financial markets attribute greater value to export data. On the other hand, import increase may reflect a strong consumer demand within the country, and it may be reasonable, for example, to increase raw material volume stock, and in both cases the economic consequences will be different.
The antipathy of currency market reactions to trade data is primarily related to the market conception as to whether the currency rate in itself is a topic of particular attention of monetary policy leaders, or not. If the dollar is at the centre of attention of financial authorities, then in case of deficit increase and a fall in export levels, markets will decide that the dollar rate must fall in order to ease exporter problems. Inflation consequences of such an expected movement of the currency rate will be negative for participants of security markets with a fixed income (government bonds). If redistribution of portfolio content will begin, this will impact the exchange rate. But if the dollar rate and inflation are not a primary source problem at the moment, then the actual fact of fallen export levels may push many shares down (the shares of export corporations), while bond prices may rise. Therefore the same economic data may cause completely reverse consequences for the currency market.
In comparison to other series of economic statistics, trade balance data does not have marked correlation with business cycle stages, as economic cycles of other countries that have their own particularities with regard to phase and amplitude changes, influence internal economic dynamics of a given country. During analysis of trade balance data, it is also important to take into consideration its evident seasonal dependence.
Every month a special branch of the Department of Labor called the Bureau of Labor Statistics, (BLS), gathers information and forms a so-called Household survey, the result of a population survey of about 60 000 selected families. Only unemployed and individuals actively seeking work are counted, that is, the registered unemployed. The received number is divided by the overall number of individuals surveyed, multiplied by 100, and this value becomes the unemployment rate.
The employment report is probably the strongest market engine. This can be explained by two main reasons. Firstly, it is very difficult to forecast population employment data, therefore announced values frequently differ from expected values and require immediate corrections. Secondly, this data accurately reflects the current state of the economy. Despite the fact that it is frequently corrected, investors view it as an immediate guide to action.
Increase in unemployment rates, as a rule, is followed by a fall in the national currency rate. These days, for every country, there exists officially released data about effective unemployment levels. That is, the acceptable and even desirable levels of unemployment for economy growth. Current levels fluctuate between 3 and 7 per cent of the entire working population depending on the country. High unemployment levels are bad. This contributes to social tensions, a decrease of middle class citizens (the backbone of democracy) and to a lowering of the overall mass of real population incomes. Low unemployment levels are bad because the workers are no longer stimulated for productive work and employer interests begin to suffer.
The optimum unemployment levels are on the crossroads of the interests of two major groups-the employers and the employees. Compromise between them is inevitable, otherwise the suffering interests of one of the groups may lead to the question being resolved via a revolution.
Index characterizes expenses linked to production of one unit of produce. It is an important index that characterizes the effectiveness of the country’s economic development. Has significant market influence. It is a good indicator of the developments of inflation processes related to increases in salary rates. Usually this index’s analysis is presented in context with values that reflect the “Productivity” index. An increase in unit labour cost together with an increase in production labour may lead to the necessity to increase major interest rates, which is a positive factor for the US dollar growth rate. Published every quarter, before the 10th of the publication month at 1:30pm (GMT), simultaneously with the “Productivity” index.
If unit wage costs rates exceed production growth rates, then this causes inflation pressure on the economy. Released monthly, has limited market influence.
Index characterizes the relationship between wholesalers and retail trade. Has limited market influence, although does provide an overview about current tendencies in these economy sectors, which may project to the overall economy. Warehouse overstocking may imply the existence of standstill events in the economy. A steady tendency in the dynamics of this indicator may have significant market influence. An increase in value of this index has negative influence on the US dollar rate. Published on around the 10th of every month at 3:00pm (GMT).
Reflects price level changes of large consignment stocks. Calculated as weighted average of 3 constituents: internal wholesale prices, trade-prices for export and trade-prices for import. WPI is considered to be a better inflation indicator than the CPI, as it directly reflects the state of the business sector. Indicator taken into consideration by the market.
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