The Importance Of Key Economic Data
Economic data can impact traded instruments and asset classes across your portfolio. Educate yourself about the key currency trading indicators and understand how they provide insight into the state of a country’s economy – leading to changes in price and influencing your trading strategy.
Written by Aaron Akwu, Head of Education Hantec Markets
Key economic data are the statistics that measure and reflect the performance and direction of an economy. They are important for various reasons, such as:
- They provide a basis for economic analysis and forecasting, which can help to understand the past, present, and future trends and patterns of economic activity and well-being. For example, by analysing the key economic data, one can identify the strengths, weaknesses, opportunities, and challenges of an economy, as well as the causes and effects of various economic phenomena and events. By forecasting the key economic data, one can also anticipate the possible scenarios and outcomes of economic activity and well-being and the risks and uncertainties involved.
- They inform and guide various actors’ economic policies and decisions, such as governments, central banks, businesses, and consumers. For example, using the key financial data, governments can design and implement appropriate fiscal and monetary policies to achieve their macroeconomic objectives, such as economic growth, price stability, full employment, and external balance. Central banks can adjust the interest rates and the money supply to influence inflation and the exchange rate. Businesses can plan and execute their production, investment, and marketing strategies to maximize profits and competitiveness. Consumers can optimize their consumption and saving behaviour to satisfy their needs and preferences.
- They facilitate economic communication and comparison among different countries and regions. For example, countries and regions can communicate and coordinate their economic policies and actions by reporting and sharing key financial data to address common issues and challenges, such as the global pandemic, climate change, and trade disputes. They can also compare and benchmark their economic performance and well-being against other countries and regions and learn from their best practices and experiences.
Some Examples of Key Economic Data are:
- Gross domestic product (GDP): The total value of all goods and services produced in a country or region during a given period, usually a year or a quarter. It measures the size and growth of an economy. GDP can be expressed in nominal terms, which use current prices, or in real terms, which adjust for inflation. GDP can also be revised for population size by dividing it by the number of people, resulting in GDP per capita. A higher GDP or GDP per capita indicates higher economic activity and well-being.
- Inflation rate: This is the percentage change in the average price level of a basket of goods and services over some time, usually a year or a month. It measures the purchasing power of money and the cost of living. Inflation can be caused by various factors, such as an increase in the money supply, an increase in the demand for goods and services, a decrease in the supply of goods and services, or a change in the exchange rate. Inflation can positively or negatively affect an economy, depending on its magnitude and duration. A moderate and stable inflation rate can encourage economic growth, investment, and consumption. In contrast, a high and volatile inflation rate can erode the value of money, distort price signals, and reduce economic efficiency.
- Unemployment rate: This is the percentage of the labour force that is actively looking for work but unable to find a job. It measures the availability and utilisation of human resources in an economy. The labour force consists of people who are either employed or unemployed, excluding those who are not working and not seeking work, such as students, retirees, homemakers, and discouraged workers. The unemployment rate can be influenced by various factors, such as the business cycle, the economy’s structure, the level of education and skills, labour market policies and regulations, and demographic and social trends. A high unemployment rate indicates low economic activity and well-being, a waste of human potential and a source of social problems.
- Personal income is the total income received by all individuals or households in a country or region during a given period, usually a year or a month. It includes the income from wages and salaries, profits and dividends, rents and interest, and transfers and benefits. It measures the income and wealth of an economy. Personal income can be expressed in nominal terms, which use current prices, or in real terms, which adjust for inflation. Personal income can also be adjusted for population size by dividing it by the number of people, resulting in personal income per capita. A higher personal income or personal income per capita indicates a higher level of economic well-being and standard of living.
- Trade balance: This is the difference between the value of exports and imports of goods and services in a country or region during a given period, usually a year or a month. It measures the external position and performance of an economy. A positive trade balance, or a trade surplus, means that the value of exports exceeds the value of imports, indicating a net inflow of foreign exchange and a contribution to the GDP. A negative trade balance, or a trade deficit, means that the value of imports exceeds the value of exports, indicating a net outflow of foreign exchange and a deduction from the GDP. The trade balance can be affected by various factors, such as the exchange rate, domestic and foreign demand, comparative advantage, and trade policies and agreements.
They are often subject to various adjustments and standardisations to ensure critical economic data’s accuracy, reliability, and comparability. One of the most common adjustments is the seasonal adjustment, which removes the effects of regular and predictable variations in the data related to the seasons, such as the weather, the holidays, and the school calendar. By applying the seasonal adjustment, the data can better reflect the underlying trends and cycles of economic activity and well-being. They can be more easily compared across different periods and regions. For example, the GDP data are usually reported in seasonally adjusted annual rates (SAAR), which means that the quarterly changes in the GDP are adjusted for seasonal factors and then multiplied by four to show what the annual growth rate would be if the quarterly rate continued for a year.
Another standard adjustment is the chain-weighting, which uses the changing composition and prices of the goods and services in the GDP to calculate the real GDP and the GDP deflator. By applying the chain-weighting, the data can better reflect the current structure and prices of the economy and can avoid the biases and distortions that may arise from using fixed weights and prices. For example, the U.S. Bureau of Economic Analysis uses the chain-weighting method to compute the real GDP and the GDP deflator since 1996, which means that the weights and prices of the goods and services in the GDP are updated every year based on the previous year’s data.
Critical economic data are essential for understanding and evaluating a country or region’s economic situation and prospects. They can provide valuable information and insights for financial analysis and forecasting, policymaking and decision-making, and communication and comparison. However, they are imperfect and have limitations and challenges, such as measurement errors and revisions, external shocks and uncertainties, and different interpretations and implications. Therefore, critical economic data should be used with caution and in conjunction with other sources of information and analysis.
Market Impact of Economic Data
The financial markets are constantly influenced by the release of key economic data, which can affect market participants’ expectations, sentiments, and behaviours, such as investors, traders, analysts, and policymakers. The key economic data can provide information and insights about the economy’s current and future state and direction, such as growth, inflation, employment, income, trade, and consumption. The market participants can use the key economic data to assess the economic conditions and prospects and to adjust their portfolios, strategies, and decisions accordingly. The market reactions to critical financial data can vary depending on various factors, such as the data’s relevance, timeliness, accuracy, surprise, market conditions, trends, and expectations.
Some examples of market fluctuations based on economic announcements are:
- Gross domestic product (GDP): A higher-than-expected GDP growth rate can indicate a strong and expanding economy, which can boost the confidence and optimism of the market participants and increase the demand and prices of the assets that are positively correlated with the economic growth, such as stocks, commodities, and currencies of the countries or regions with high GDP growth. A lower-than-expected GDP growth rate can indicate a weak and contracting economy, which can reduce the confidence and optimism of the market participants and decrease the demand and prices of the assets that are positively correlated with economic growth, such as stocks, commodities and currencies of the countries or regions with low GDP growth.
- Inflation rate: A higher-than-expected inflation rate can indicate a rising and unstable price level, which can erode the value of money and the actual returns of the assets that are negatively correlated with the inflation, such as bonds, cash, and currencies of the countries or regions with high inflation. A lower-than-expected inflation rate can indicate a falling and stable price level, which can preserve the value of money and the actual returns of the assets negatively correlated with inflation, such as bonds, cash, and currencies of the countries or regions with low inflation.
- Unemployment rate: A lower-than-expected unemployment rate can indicate a high and efficient level of employment, which can increase the income and consumption of the households and support economic growth and stability. A higher-than-expected unemployment rate can indicate a low and inefficient level of employment, which can decrease the income and consumption of the households and hamper economic growth and stability.
- Personal income: A higher-than-expected personal income can indicate a high and growing level of income and wealth, which can increase the consumption and saving of the households and stimulate economic activity and well-being. A lower-than-expected personal income can indicate a low and declining level of income and wealth, which can decrease the consumption and saving of the households and dampen economic activity and well-being.
- Trade balance: A higher-than-expected trade surplus or a lower-than-expected trade deficit can indicate a net inflow of foreign exchange and a contribution to the GDP, which can increase the demand and prices of the assets that are positively correlated with the trade balance, such as the currencies and the stocks of the countries or regions with a trade surplus or a low trade deficit. A lower-than-expected trade surplus or a higher-than-expected trade deficit can indicate a net outflow of foreign exchange and a deduction from the GDP, which can decrease the demand and prices of the assets that are positively correlated with the trade balance, such as the currencies and the stocks of the countries or regions with a trade deficit or a low trade surplus.
The market impact of economic data is an essential aspect of financial analysis and trading, as it can provide opportunities and challenges for the market participants to profit from or hedge against market movements and volatility. However, the market impact of economic data is not always predictable and consistent, as it can depend on various factors, such as the data’s relevance, timeliness, accuracy, and surprise, as well as the market conditions, trends, and expectations. Therefore, the market participants should be cautious and flexible when using economic data to analyse and trade the financial markets and should also consider other sources of information and analysis.
For example, on September 2, 2021, the U.S. Census Bureau and the U.S. Bureau of Economic Analysis reported that the U.S. trade deficit widened to $70.1 billion in July 2021, up from $73.2 billion in June 2021, and below the market expectation of $74.1 billion. The U.S. dollar index, which measures the value of the U.S. dollar against a basket of six major currencies, reacted positively to the smaller-than-expected trade deficit, as it rose by 0.15 per cent to 92.42 on the same day. This was because the data showed that U.S. imports decreased by 2.2 per cent to $277.7 billion in July 2021, while the exports increased by 1.3 per cent to $207.7 billion, indicating a more robust domestic demand and a more competitive external position. However, the U.S. stock market reacted negatively to the trade data, as the Dow Jones Industrial Average fell by 0.14 per cent, the S&P 500 fell by 0.03 per cent, and the Nasdaq Composite fell by 0.13 per cent on the same day. This was because the data also showed that the U.S. sales of goods and services to China, the U.S.’s largest trading partner, fell by 6.5 per cent to $12.8 billion in July 2021, while the purchases from China rose by 2.9 per cent to $44.8 billion, resulting in a record-high trade deficit of $32 billion with China. This raised concerns about the trade tensions and the geopolitical risks between the two countries, which could affect the industry and the site of production and investment.
The market impact of economic data is an essential aspect of financial analysis and trading, as it can provide opportunities and challenges for the market participants to profit from or hedge against market movements and volatility. However, the market impact of economic data is not always predictable and consistent, as it can depend on various factors, such as the data’s relevance, timeliness, accuracy, and surprise, as well as the market conditions, trends, and expectations. Therefore, the market participants should be cautious and flexible when using economic data to analyse and trade the financial markets and should also consider other sources of information and analysis.
