Interpretation of Economic Indicators
Interpretation of Economic Indicators
Key Indicators for Fundamental Analysis
- Auto/Truck sales
- Auto and Truck Sales measure the monthly sales of all domestically produced vehicles. They are considered an important indicator of consumer demand, accounting for 25 % of total retail sales.
- Beige Book
- A commonly used name for the Fed report entitled "Summary of Commentary on Current Economic Conditions by Federal Reserve District." It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting. The beige book generally consists of reports from bank and branch directors and interviews with key business contacts.
- Central Bank Interest Rate
- These are the interest rates levied by the government on any money borrowed from the Federal Reserve banks. The rates set by the Federal Reserve board apply to all other banks as they also have to keep their reserves with the federal bank. It therefore means that they too have to pass on the same rates to their clients in the money supply chain.
- China investment Corporation
- This is a government-sponsored entity of the People's Republic of China that seeks to invest in securities and commodities abroad. The CIC was initially funded with around $200 billion, which originated from the issuance of long-term treasury bonds by the People's Bank of China. The bond proceeds were then converted into dollars through the foreign exchange market
- Conference Board
- The Conference Board conducts a monthly survey of 5000 households to ascertain the level of consumer confidence. The report can occasionally be helpful in predicting sudden shifts in consumption patterns. Only index changes of at least five points should be considered significant. The index consists of two sub-indices - consumers' appraisal of current conditions and their expectations for the future. Expectations make up 60% of the total index, with current conditions accounting for the other 40%. The expectations index is typically seen as having better leading indicator qualities than the current conditions index.
- The Consumer Price Index, which takes the average level of prices of a fixed basket of goods and services purchased by the consumers, is a primary inflation indicator because consumer spending accounts for nearly two-thirds of economic activity. A rising CPI is often followed by higher short-term interest rates, which can be supportive for a currency in the short term. However, if inflation becomes a long-term problem, confidence in the currency will eventually be undermined and it will weaken.
- Currency Carry Trade
- A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
- Current Account
The Current Account is an important part of international trade data as it is the broadest measure of sales and purchased goods, services, interest payments and unilateral transfers. The trade balance is contained in the current account.In general, a Current Account deficit can weaken the currency.
- Deflation is the opposite of inflation. It has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
- Durable Goods
- Durable Goods orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Monthly percent changes reflect the rate of change of these orders. The durable goods orders index is a major indicator of manufacturing sector trends. Rising durable goods orders are normally associated with stronger economic activity and can lead to higher short-term interest rates, which is usually supportive for a currency.
- Employment Report
- The Employment Report is actually two separate reports which are the results of two separate surveys. The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate. The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures. The reports both measure employment levels, just from different angles.
- Elliott Waves
- Elliott classifies price movement in patterned waves that can indicate future targets and reversals. Waves moving with the trend are called impulse waves, whereas waves moving against the trend are called corrective waves. Elliott Wave Theory breaks down impulse waves and corrective waves into five primary and three secondary movements respectively. The eight movements comprise a complete wave cycle. Time frames can range from 15 minutes to decades.
- Existing Home Sales
- Existing Home Sales is a report that details the sale of already constructed homes that have been in the market and are simply changing ownerships as people change dwellings either because of preference, having moved to new areas or any other reasons.
- Export/Import Prices
- Export/import Prices are a useful indication of inflation pressures created by changes in foreign exchange rates. For example, when the dollar is strong, import prices tend to be under downward pressure in the United States. If an item in Japan costs 1,000 yen and the exchange rate is 100 yen to the dollar, the price of the item is $10 in the United States. If the dollar then strengthens to Y120, the US$ price falls to $8.34. Because US exports must compete with foreign goods, there is also downward pressure on export prices when the dollar is strong.
- Factory Orders
- Factory Orders consist of the earlier announced Durable Goods report plus non-durable goods orders. The report is very predictable with nondurables the only new component. Non-durables consist of such items as food and tobacco products which grow at a fairly consistent monthly rate, so that market forecasts for this report are far more accurate than for the Durable orders report. In addition to seeing nondurables for the first time, the market also watches for revisions to the Durable orders data, which can be significant. At present, Durable Goods orders sum to about 56% of total orders.
- Fibonacci Retracement
- Fibonacci Retracement is a popular retracement series based on mathematical ratios arising from natural and man-made phenomena. It is used to determine how far a price has rebounded or backtracked from its underlying trend. The most important retracement levels are 38.2%, 50% and 61.8%.
- Gross Domestic Product is the broadest measure of economic activity of a country. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. Inventory and net export can produce significant volatility in GDP. The final sales figure, which excludes inventories, can sometimes be helpful in identifying underlying growth trends as inventories represent unsold goods, and a large inventory increase will boost GDP but might be indicative of weakness rather than strength. The broad components of GDP are consumption, investment, net exports, government purchases, and inventories. Consumption is by far the largest component, roughly 2/3rds of GDP.
- Housing Starts
- Housing Starts measure initial construction of residential units each month. Housing Starts are closely watched as it gives an indicator of the general sentiment in the economy. High construction activity is usually associated with increased economic activity and confidence and can be predictive of higher short-term interest rates.
- Industrial Production
- Industrial Production is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used. The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
- The general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
- Initial Jobless Claims
- Initial Jobless Claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims, potentially signaling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend.
- Inventory to Sales
- The inventory-to-sales ratio measures the number of months it would take to deplete existing inventory at current sales rates. A relatively low (high) ratio may mean that manufacturers will have to build up (draw down) inventory levels. Depending on the strength of final demand and the degree to which recent inventory changes have been intended or unintended, this can have an effect on the industrial production outlook. Note that this information is much more useful to market economists than it is to other market participants.
- Japan Tankan Survey
- Japan Tankan Survey is a largely influential Japanese economic confidence survey carried out every quarter of the year to gauge the business confidence or in confidence among different business executives. This is one of the most important economic reports in the Japanese economic calendar with far reaching impacts across the globe. All multinational companies doing business in the eastern region look up to this report to gauge the future of the economy given that Japan is the world's second largest economy after the U.S.
- Michigan Index
- The Michigan Index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two sub-indices - expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.
- New Home Sales
- New Home Sales is the monthly report of new single-family home sales. It is produced by the census bureau and contains prices and inventory figures of new homes at the national level.
- Non-farm Payroll Number
- The Non-farm Payroll is currently regarded as the most important among all US economic indicators. It is usually released on the first Friday of the month. The report provides a comprehensive look of the economy and it is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the net number of new jobs created or lost during the month and it is widely followed as an important indicator of economic activity. Large increases in the payroll employment are considered signs of strong economic activity that could eventually lead to higher interest rates, which is generally supportive of the currency at least in the short term. If, however, it is estimated that an inflationary pressure is building up, this may undermine the longer term confidence in the currency
- Non-farm Productivity and Costs
- Non-farm Productivity and Costs provide measures of the productivity of workers and the costs associated with producing a unit of output. During times of inflationary concern, the unit labor cost index in this report can move the market. If productivity is falling, unit labor cost may be rising faster than hourly earnings and other labor cost measures, because productivity can be quite volatile from one quarter to the next and
- Personal Income
- Personal Income measures income from all sources. The largest component of total income is wages and salaries, a figure which can be estimated using payrolls and earnings data from the employment report. Beyond that, there are many other categories of income, including rental income, government subsidy payments, interest income, and dividend income. Personal income is a decent indicator of future consumer demand, but it is not perfect. Recessions usually occur when consumers stop spending, which then drives down income growth. Looking solely at income growth, one may therefore miss the turning point when consumers stop spending.
- The Producer Price Index measures the monthly change in wholesale prices and is broken down by commodity, industry, and stage of production. The PPI gives an important inflation indication as it measures price changes in the manufacturing sector - and inflation at the producer level often gets passed straight through to consumers.
- Pivot Point
- The primary support/resistance point calculated basing on the previous trade's high, low and closing prices.
- Regional Surveys on Purchasing Management
- There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. The purchasing managers' reports are measured like the National Association of Purchasing Management - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices, 0 is the breakeven mark.
- Reserve Currency
- A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.
- Retail Sales
- The Retail Sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer
- Trade Balance
- The Trade Balance reflects the difference between a nation's exports and imports of goods. A positive trade balance, or a surplus, occurs when a country's exports exceed imports. A negative trade balance, or a deficit, occurs when more goods are imported than exported. Trade Balances are closely followed by players in FX, because of the influence they can have. It is often used as an assessment of the overall economic activity in a country's or region's economy. Export activities not only reflect the competitive position of the country in question, but also the strength of economic activity abroad. Trends in the import activity reflect the strength of domestic economic activity. A country that runs a significant trade balance deficit tends to generally have a weak currency. However, this can be offset by substantial financial investment inflows.
- A minimum change in price, up and down.
- Trade Balance
- Measures the difference in value between imported and exported goods and services. Nations with trade surpluses (exports greater than imports), such as Japan, tend to see their currencies appreciate, while countries with trade deficits (imports greater than exports), such as the US, tend to see their currencies weaken.
- Trading Platform
- The set of software and technical resources that support financial market trading information to be received in real time; processes trading operations, takes into account mutual obligations between the client and the dealer, and observes conditions and restrictions as well. For the purposes of the present regulation, it consists of the "Server" and "Client" terminals.