Economic indicators often have a marked impact on the prices of world currencies. Therefore, a lot of traders are always watchful of the economic calendar to make sure they are informed of any potential volatility bumps that are on the road ahead.
What are the most important economic indicators?
All over the world, several governmental and non-governmental bureaus report on a regular basis specific pieces of information on economics. The means by which these records are gathered can differ considerably. The data is sometimes as direct as reporting monthly sales from a certain sector of the economy.
Others may be based on opinions recorded in surveys, and not gotten from hard data. Yet, others may obtain their findings by concluding from existing data.
Some indicators will reveal what is yet to come about an economy; others may shed some light on the past performance: while others will tell you about the current state of that particular economy. This first set — also called the top leading economic indicators — are of special interest to traders, as they give the best insight into the possible path of economic activity. Coincident is a set of indicators that reveal the current state of the economy. Lagging indicators are those that confirm what has already occurred. All these three impact the Forex market in different ways, as they have separate uses.
Knowing which indicators are the important ones, and which ones are low-impact, are the main difficulty for traders who are just starting out. This knowledge is beneficial as there may be several economic indicators issued in a single day, and it’s not possible to keep an eye on them all.
To be helpful in this aspect, we have made an informative list of important economic indicators. This economic indicators list, include those that we consider the most significant ones. All of these can exert a substantial impact on the financial markets.
Our list centers on the US reports to give you the best economic indicators types, as the United States economy is the largest economy in the world, and has substantial impact on the global performance of global markets.
Gross Domestic Product (GDP)
GDP is the most comprehensive measure of the overall wellness of an economy. It takes such an extended period to gather that its direct effect on the prices of financial instruments is usually unnoticed — by the time the information is issued, most of the date is already known, and, therefore, expectations are often reasonably accurate. However, it still can move the market, should the number come out notably different to expectations. It is still a significant indicator to understand despite its lack of timeliness because it is the single best yardstick used to confirm our stance in the business cycle.
Economists determine where we are in the business cycle by looking at variations of growth and shrinkage in GDP because it is the broadest gauge of economic activity. Two consecutive quarters of contraction in GDP is what is technically referred to as a recession. As soon as the economy witnesses a quarter of growth, a recession ends.
Therefore, something handy would be the one that can be used as a close substitute for GDP, but that comes more frequently – which leads us on to the next indicator on the list.
Nonfarm Payrolls (NFP)
The NFP is the single most important indicator in the monthly calendar for most CFD and Forex traders. It’s released alongside the unemployment rate on the first Friday of every month by the Bureau of Labor Statistics (BLS). The report is so closely followed because it tends to move Forex markets considerably.
Why does it have such a substantial impact on market prices?
The timeliness of the report partly answers this question. Historically, fluctuations in nonfarm payrolls have always thread a very comparable path to quarterly GDP changes, as employment and the business cycle are closely related. This close similarity indicates payroll data can be used as a substitute for GDP. The significant variance between the two is that in contrast to the GDP, which is reported quarterly and with a considerable delay, Nonfarm payrolls are released monthly, revealing statistics about the month that just ended.
The influence this report has on monetary policy ultimately answers the question. Stable prices and maximum employment are two of the Fed’s Three Monetary Objectives. Therefore, employment data can have a dire effect on market insights about the future trend of monetary policy. To learn more about how to approach NFP report and take most advantage from trading standpoint, please read our guide on effective NFP trading strategies.
The unemployment rate is the percentage of the labor force actively in search of jobs. Unemployment acts as a lagging indicator in times of recovery. We often see unemployment remain on the rise even after GDP has flat out. Unemployment is also closely associated with customer sentiment. Lengthy periods of unemployment are significantly damaging to consumer sentiment, and as a result, affect consumer spending and influence on economic growth.
Unemployment data offers CFD trader insights into one of the critical metrics followed by the Fed, just like the nonfarm payrolls.
This implies any marked divergence from expectations is possible to have a significant influence on Forex and stock markets. All things being equal, weakness in the US labor market would traditionally be deemed to be bearish for stock prices and the US dollar.
Federal Funds Rate
As part of its regular schedule to determine US monetary policy, the Federal Open Markets Committee (FOMC) meets eight times a year.
Should there be any variation from the expected course, the outcome of an FOMC meeting can notably affect the Forex market.
The critical fundamentals that propel Forex rates are the interest rates level in the two countries concerned and expectations regarding where those rates will head. Should the Fed change insights about the future course of monetary policy or make a change to the federal funds rate, the extent to which such changes can affect the value of the USD can be substantial.
The Fed gives forward direction about the likely path of monetary policy, as part of the statement issued after each FOMC meeting.
This is a moderately recent measure, intended at providing excellent transparency as part of an effort to diminish volatility in financial markets. As a result, variations in monetary policy are regularly communicated to some degree in advance. This indicates the forward guidance itself can move the markets, just as much as a real change in policy.
Any serious CFD or Forex trader will always make sure they know the Calendar for FOMC Meetings.
The University of Michigan Index of Consumer Sentiment/Consumer Confidence Index
We have two reports at the number five spot on our list. The Consumer Sentiment Index, collected by the University of Michigan, and the Consumer Confidence Index, gathered by the Conference Board. These two are the best known of all consumer surveys, and they are the most widely followed by Forex/CFD traders and economists.
These reports are essential because consumer spending drives the US economy like nothing else. Consumer confidence lets us know how consumers are feeling. These two reports should be highlighted in any top economic indicators list, because consumer pessimism or optimism has such substantial implications for the prospects of the economy.
The Consumer Confidence Index is released close to the end of the month, while the University of Michigan issues its survey two times a month. This contains a prefatory reading on the second to last Friday of the month. Two weeks later, a concluding estimate follows. These reports have the most influence on the Forex and stock markets when the business cycle is near a turning point.
Great consumer sentiment indicates a likely growth for the economy in the long run, which is bullish for stocks. Low consumer sentiment forecasts a downturn and is bearish for the stock market.
The Conference Board’s report has greater statistical reliability, as it samples a wider body of respondents. Both often correlate reasonably well with changes in the business cycle, but the labor market profoundly influences them. Sentiment may remain depressed if unemployment remains high when other sectors of the economy are recovering, therefore functioning as a lagging indicator in such situations.
Consumer Price Index (CPI)
The CPI measures the changes in the prices of basic consumer goods and services, excluding automobiles. As discussed earlier, price stability is one of the key benchmarks that Federal Reserve takes into consideration when planning adjustments to interest rate and monetary policies. Inflation is considered normal or even desirable when it is within target levels, which the Fed reportedly considers acceptable at 2-3% on the yearly basis. However, inflation can have very adverse effects on the economy, if it veers too far off target for too long. Economists at the Fed tend to concentrate on the PCE price index that is issued as part of the GDP report. This is only published quarterly, so CFD and Forex traders usually follow the CPI as it is a somewhat timely pointer of inflation.
CPI’s application as a leading economic indicator is limited. It has shown to be a weak forecast of turning points in the business cycle, despite a logical and natural association connecting economic growth, higher prices, and demand. High inflation was a real problem for the US economy in the 1970s and early 1980s. In contrast, there was a real threat of deflation in the aftermath of global financial crisis. Deflation can have disastrous consequences on the economy as it prompts consumers to save rather than spend, causing business to liquidate inventories at low prices. This will hinder economic growth and can produce a vicious circle, as a large part of GDP is composed of the consumer spending.
The CPI report can have a high influence on prices in the Forex, and stock markets because inflation in directly linked to future changes in the monetary policy.Usually, it is deviations from expected outcomes that tend to have the highest influence. For instance, if CPI issued is higher than expected, it will change the opinions that the Fed will be more inclined to tighten monetary policy as time goes on. This should be bullish for the US dollar, all things being equal. Likewise, a Forex trader might interpret such inflationary information as bearish for the stock market, as tighter monetary policy often reduces risk appetite.
Industrial Production Index
The IPI measures the level of US output relative to a specific year over three extensive areas: mining, gas and electric utilities, and manufacturing. The Federal Reserve gathers the report and publishes it almost the middle of every month. Some of the index reports come from hard data, reported directly for specific industries from trade organizations or official surveys, but this may not always be possible on a monthly basis. To make up for this, the Fed makes assessments using substitutes, like the amount of power used in the month by the concerned industry, or hours worked from the employment report.
The full process for determining the index is carried out in the best place to look for a complete outline of the methodology associated – the Fed’s Explanatory Pages.
Hundreds of elements make up the index, which is reported as an index level. For instance, the preliminary statement of the industrial production index for May 2017 was calculated at 105.0. This is an illustration of the current output in contrast to the base year, which was 2007 as at the time of writing. Therefore, the May 2017 estimated at 105.0 implies, that production levels were 5 percent higher than the average level in the base year of 2007.
Manufacturing is closely monitored by FX and CFD traders, even though it only makes up roughly 20% of the US economy. Just like the construction sector, the industrial sector is important because it is responsible for most of the variation in US output seen in the business cycle and can give insights into the evolution of structural economic reforms. The Industrial Production Index magnifies the fluctuations in an economic cycle. This indicates there is an agreement between its actions and the variations in the business cycle. The relationship between this index and economic activity is tight enough for some analysts to use this report as an early signal on the performance of GDP.
This indicator measures how the US manufacturing sector is operating as a balance of full capacity. Full capacity is defined as the highest level of sustainable output that can be reached by a factory within a practical framework. Simply put, it takes into account things like usual downtime. It is estimated as a ratio of the industrial production index to an index of full capacity. This provides a timely indication of economic health and an insight into trends that may be developing in the manufacturing sector.
It may also give hints about inflation. It’s a reasonable assumption that producers may raise prices if factories are running hot. Machines are likely to fail due to being overworked if factories are running close to their maximum capacity. Taking machines offline poses the risk of firing workers at a time of high demand, which is pretty undesirable. Therefore, instead of laying off workers, manufacturers are likely to cope with high demand by raising prices. Consequently, this will affect consumer prices and will lead to higher inflation.
On the other hand,capacity utilization at low levels may be an indicator of economic weakness. As a rule, rates lower than 78% often point to a forthcoming recession — or may even indicate the economy is in recession already.
Therefore, this indicator is used to measure trends in the wider economy, manufacturing, as well as inflation. This makes it a significant indicator for Forex and CFD traders to follow, especially for bond traders.
This report is more appropriately known as Advance Monthly Sales for Retail Trade. However, Forex traders simply refer to it as Retail Sales. A division of the U.S. Department of Commerce, Census Bureau issues the report at 08.30 ET two weeks after the month in question.
The report provides an early measure of the nominal dollar value of sales in the retail sector and also reports the number as a percentage deviation from the past month. It is this latter figure that CFD and Forex traders usually respond to. It is a closely-followed report and can send disorders through market prices, especially if there is a significant deviation between the figure reported and Wall Street expectations.
It is such a closely-followed report as a result of PCE (Personal Consumption Expenditures) PCE is a significant contributor to the US economic growth. It’s also worth contrasting with the Personal Income and Outlays report from the BEA (Bureau of Economic Analysis). This explicitly includes a PCE element, which then affects the GDP calculations directly. The information covered in that report is more extensive than that of retail sales report. Crucially, though, retail sales provide timely insight into effectively the same area of the economy, as its data comes out a good couple of weeks earlier.
As an indication of economic health, an increase in retail sales often has a bullish influence on the stock market. However, there are inflationary considerations, as strong sales data may lead to rising prices. This is bearish for bond prices, as it often has a positive effect on the US dollar. On the other hand, weakness in the retail sales report depresses the stock market, bullish for bond prices, but is bearish on the US dollar.
From an analysis perspective, specific elements of the report may contribute to undesired volatility. Because of the expense of such elements, Motor vehicles are often not evenly distributed monthly.
Thus, analysts tend to focus on retail sales excluding auto sales to remove random variations and understand underlying trends in the data more efficiently.
Advance Report on Durable Goods
The Census Bureau releases the report on Durable Goods Orders. This report is released about 18 business days into the month after the particular month for which it is reporting.
Durable goods are used to refer to items that are supposed to last for three or more years. Simply put, we are generally talking about expensive items that are often infrequently bought. This infrequency indicates volatility controls the report and you need to be very cautious about what you read into one report in solitude.
In an attempt to mitigate this volatility, analysts usually exclude the transport component of the report. Another approach used is to consider many reports together to try and measure some feeling for an underlying trend. Also, take note of the revisions to the past month’s data, which can be valuable.
We would expect to see improvements in new orders for durable goods if demand is strong and companies have an upbeat forecast.
Conversely, we would expect to see lower orders, in a weak economic climate. Therefore, weakness in this report is bearish for risk appetite, and strength is bullish. All things being equal, strength in durable goods is a positive sign for stocks, as far as CFD traders go. Regarding the impact on the Forex market, it is a comparable account for the US dollar concerning stocks: a burgeoning economy would often lean towards a tighter bias in monetary policy from the Fed. Therefore, a strong report is bullish for USD.
Initial Jobless Claims
This Weekly Report gauges the number of people making first-time applications for unemployment benefits insurance. This gives a valuable update on the health of the labor market, primarily when it corresponds to the sample week adopted for the Employment Situation report.
Even though there is no precise correlation between jobless claims and the all-important monthly nonfarm payrolls report, they are a valuable resource for trying to perceive upcoming changes in the nonfarm payrolls report. It is more likely that short-term variations in the labor market will be revealed in the weekly reports of initial jobless claims data than in the monthly employment report. However, this is one of the more influential weekly reports on Forex and CFD prices.
Conclusions on Economic Indicators and Their Influence on Trading Markets
We hope these explanations of economic indicators have benefited you. Of course, the list is far from extensive, but you should find those covered here are among the more influential economic indicators for Forex trading. Don’t forget, that when we have explained the possible influence of economic results, it is with the caution of ceteris paribus (all things being equal.) Which implies the actual outcomes may be more nuanced than merely one factor being at play.
For the US dollar, a strong payrolls result would generally be deemed a bullish outcome, but Forex traders also have to consider how inflation expectations may be affecting monetary policy, the route other central banks are trailing, and what has previously been valued into the Forex market.