Fundamental Analysis and leading market (economic) indicators
Fundamental analysis is a method of forecasting future price movements of a financial instrument based on economic, political, environmental and other relevant factors, as well as data that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Among the factors considered are: supply and demand; seasonal cycles; weather; government policy.
The fundamental analyst studies the causes of market movements, while the technical analyst studies the effect. Fundamental analysis is a macro, or strategic, assessment of where a currency should be traded, based on any criteria but the movement of the currency’s price itself. These criteria often include the economic conditions of the country that the currency represents, monetary policy, and other “fundamental” elements.
Many profitable trades are made moments prior to, or shortly after, major economic announcements.
Leading economic indicators
The following is a list of economic indicators used in the USA. Obviously, there are many more, as well as those of other leading economies (such as Germany, the UK, Japan, etc.). In general, it is not only the numerical value of an indicator that is important, but also the market’s anticipation and prediction of the forecast, and the impact of the relation between anticipated and actual figures on the market.
Such macro indicators are followed by the vast majority of traders worldwide. The “quality” of the published data can differ over time. The value of the indicator data is considered greater if it presents new information, or is instrumental to drawing conclusions which could not be drawn under other reports or data. Furthermore, an indicator is highly valuable if one may use it to better forecast future trends.
Note that in the USA most indicators are published on certain weekdays, rather than on a particular monthly date (e.g. the second Wednesday in each month, as opposed to the 14th of each month, etc.).
Each indicator is marked as High (H), Medium (M) or Low (L), according to the importance commonly attributed to it.
[H] CCI – Consumer Confidence Index
The Conference Board; last Tuesday of each month, 10:00am EST, covers current month’s data
The CCI is a survey based on a sample of 5,000 U.S. households and is considered one of the most accurate indicators of confidence. The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power. The respondents answer questions about their income, the market condition as they see it, and the chances to see increase in their income. Confidence is looked at closely by the Federal Reserve when determining interest rates. It is considered to be a big market mover as private consumption is two thirds of the American economy.
[H] CPI – Consumer Price Index; Core-CPI
Bureau of Labor and Statistics; around the 20th of each month, 8:30am EST, covers previous month’s data
The CPI is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). The CPI is one of the most followed economic indicators and considered to be a very big market mover. A rising CPI indicates inflation. The Core-CPI (CPI, excluding food and energy, expense items which are subject to seasonal fluctuations) gives a more stringent measure of general prices.
[H] Employment Report
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data
The collection of the data is gathered through a survey among 375,000 business and 60,000 households. The report reviews: the number of new work places created or cancelled in the economy, average wages per hour and the average length of the work week. The report is considered as one of the most important economic publications, both for the fact that it discloses new up-to-date information and due to the fact that, together with NFP, it gives a good picture of the total state of the economy. The report also breaks out data by sector (e.g. manufacturing, services, building, mining, public, etc.)
[H] Employment Situation Report
Bureau of Labor and Statistics; the first Friday of each month, 8:30am EST, covers previous month data
The Employment Situation Report is a monthly indicator which contains two major parts. One part is the unemployment and new jobs created: the report reveals the unemployment rate and the change in the unemployment rate. The second part of the report indicates things like average weekly hours worked and average hourly earnings. This data is important for determining the tightness of the labor market, which is a major determinant of inflation. The Bureau of Labor surveys over 250 regions across the United States and covers almost every major industry. This indicator is certainly one of the most watched indicators and almost always moves markets. Investors value the fact that information in the Employment report is very timely as it is less than a week old. The report provides one of the best snapshots of the health of the economy.
[H] FOMC Meeting (Federal Open Market Committee): Rate announcement The meeting of the US Federal Bank representatives, held 8 times a year. The decision about the prime interest rate is published during each meeting (around 14:15 EST).
The FED (the Federal Reserve of USA) is responsible for managing the US monetary policy, controlling the banks, providing services to governmental organizations and citizens, and maintaining the country’s financial stability.
There are 12 Fed regions in the USA (each comprising several states), represented in the Fed committee by regional commissioners.
The rate of interest on a currency is in practice the price of the money. The higher the rate of interest on a currency, the more people will tend to hold that currency, to purchase it and in that way to strengthen the value of the currency. This is very important indicator affecting the rate of inflation and is a very big market mover.
There is great importance to the FOMC announcement, however – the content of the deliberation held in the meeting, which is published 2 weeks after the rate announcement, is almost as important to the markets.
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[H] GDP – Gross Domestic Product
BEA (Bureau of Economic Analysis); last day of the quarter, 8:30am EST, covers previous quarter data.
The US Commerce department publishes the GDP in 3 modes: advance; preliminary and final.
GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance. The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released.
The Commerce Department releases an “advance report” on the last day of each quarter. Within a month it follows up with the “preliminary report” and then the “final report” is released yet a month later. The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country’s economy is growing (or shrinking).
[H] ISM (Institute for Supply Management) Manufacturing Index Institute for Supply Management; the first business day of the month, 10:00am EST, covers previous month data
The Manufacturing ISM Report on Business is based on data compiled from monthly replies to questions asked of purchasing executives in more than 400 industrial companies. It reflects a compound average of 5 main economic areas (new customers’ orders 30%; manufacturing 25%; employment 20%; supply orders 15%; inventories 10%). Any data over 50 points shows the expansion of economic activities, and data under 50 points shows a contraction.
[H] MCSI – Michigan Consumer Sentiment Index
University of Michigan; first of each month, covers previous month data A survey of consumer sentiment, conducted by the University of Michigan. The index is becoming more and more useful for investors. It gives a snapshot of whether or not consumers feel like spending money.
[H] NFP – Changes in non-farm payrolls
Department of Labor; the first Friday of each month, 8:30am EST, covers previous month data
The data intended to represent changes in the total number of paid U.S. workers of any business, excluding the following:
– general government employees;
– private household employees;
– employees of nonprofit organizations that provide assistance to individuals;
– farm employees.
The total non-farm payroll accounts for approximately 80% of the workers responsible for the entire gross domestic product of the United States. The report is used to assist government policy-makers and economists in determining the current state of the economy and predicting future levels of economic activity. It is a very big market mover, due largely to high fluctuations in the forecasting.
[H] PMI – Purchasing Managers Index
Institute for Supply Management; the first business day of each month, 10:00am EST, covers previous month’s data
The PMI is a composite index that is based on five major indicators including: new orders; inventory levels; production; supplier deliveries and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries. A PMI index over 50 indicates that manufacturing is expanding, while anything below 50 means that the industry is contracting. The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popularly used for detecting inflationary pressure as well as indicating manufacturing activity. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month, it is very timely. Should the PMI report an unexpected change, it is usually followed by a quick reaction in market. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
[H] Retail Sales Data; Retail Sales less Automotives
Bureau of Census; around the 12th of each month, 8:30am EST, covers previous month’s data
Retail sales are a key driving force in US economy. This indicator tracks the merchandise sold by companies within the retail trade and measures the total consumer spending on retails sales (not including service costs). The retail revenues are a major part (two thirds) of the US
economy. The Census Bureau surveys hundreds of various sized firms and business offering some type of retail trade. Every month the data is released showing the percent change from the previous month’s data. A negative number indicates that sales decreased from the previous months sales. This indicator is a very big market mover because it is used as a gauge of consumer activity and confidence, as higher sales figures indicate increased economic activity. The data is very timely because retail sales data is released within 2 weeks of the previous month.
[H] Tankan Survey
BoJ (Bank of Japan); four times a year in April, July, October and mid-December; 10:50pm GMT
An economic survey of Japanese business issued by the central Bank of Japan, which it then uses to formulate monetary policy. The survey covers thousands of Japanese companies with a specified minimum amount of capital, although firms deemed sufficiently influential may also be included. The companies are asked about current trends and conditions in the business place and their respective industries, as well as their expected business activities for the next quarter and year. It is considered a big market mover for JPY currency pairs.
[H] TIC (Treasury International Capital) Data on transactions in long termsecurities
Department of the Treasury; around the 12th working day of each month, 9:00am EST, covers month before previous data
The TIC data provides information about the most important way the US is financing its ongoing current account deficit: selling long-term securities to foreigners, or exporting debt. It is important to remember that there are other ways of financing a deficit: borrowing from foreign banks or attracting net FDI inflows. But since FDI flows have been negative and bank flows tend to be small, most of the financing the US needs has come from the sale of longterm securities to foreigners. TIC data are a good measurement of how much a country is trusted in the international investment community. It is considered a big market mover.
[H] Trade Balance
Department of Commerce; the second week of each month, 8:30am EST, covers month before previous data
A country’s trade balance is the largest component of a country’s balance of payments. The balance of trade measures the difference between the value of goods and services that a nation exports, and those it imports. A country has a trade deficit if it imports more than it exports. The opposite scenario is a trade surplus. It is considered a very big market mover.
[M] Budget Statement Monthly
A monthly report by US government (the Treasury Department), showing the monthly budget deficit or surplus
The level of deficit/surplus affects the level of US bonds issues by the government, hence –
their price. In addition, this report reflects the level of tax collected by the government, which is indicative of the level of economic activity. Consequently, the April report (the month in which Americans submit their tax returns) is even more important than those released in other months.
[M] Composite Index of Leading Indicators
The Conference Board; around the 20th of each month, 10:00am EST
An index used
to predict the direction of the economy’s movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. These 10 components include:
1. the average weekly hours worked by manufacturing workers;
2. the average number of initial applications for unemployment insurance;
3. the amount of manufacturers’ new orders for consumer goods and materials;
4. the speed of delivery of new merchandise to vendors from suppliers;
5. the amount of new orders for capital goods unrelated to defense;
6. the amount of new building permits for residential buildings;
7. the S&P 500 stock index;
8. the inflation-adjusted monetary supply (M2);
9. the spread between long and short interests rates;
10. consumer sentiment.
By looking at the Composite Index of Leading Indicators in the light of business cycles and general economic conditions, investors and businesses can form expectations about what’s ahead, and make better-informed decisions. It has medium importance, as its many components are already known at the time of its publication.
[M] Current Account
BEA (Bureau of Economic Analysis); quarterly, around six weeks after quarter end The difference between a nation’s total exports of goods, services and transfers, and its total imports of the same. Current account balance calculations exclude transactions in financial assets and liabilities. The level of the current account is followed as an indicator of trends in foreign trade, so it is regarded as a big market mover.
[M] Durable Goods
Bureau of Census; the fourth week of each month, 8:30am EST, covers previous month data
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended. Rising Durable Goods Orders are normally associated with stronger economic activity, and can therefore lead to higher short-term interest rates. Higher rates often support a currency, at least in the short term.
[M] GDP Price Deflator
BEA (Bureau of Economic Analysis); last day of the quarter, 8:30am EST, covers previous quarter data
The GDP deflator shows how much a change in the base year’s GDP relies upon changes in the price level. Also known as the “GDP implicit price deflator.” As it is not based on a fixed basket of goods and services, the GDP deflator has an advantage over the consumer price index (CPI). Changes in consumption patterns, or the introduction of new goods and services, are automatically reflected in the deflator. This indicator is of medium importance to the markets.
[M] Housing Starts
Bureau of Census; around the middle of each month, 8:30am EST, covers previous month data
This economic indicator tracks how many new single-family homes or other residential buildings were constructed through the month. For the survey, each house and each single
apartment is counted as one housing start. This indicator is not a huge market mover, but it has been reported by U.S. Census that the housing industry represents over 25% of all investment dollars, and a 5% value of the overall economy. Housing starts are considered to be a leading indicator, meaning it detects trends in the economy looking forward. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn.
[M] Industrial Production Capacity; Production Utilization Federal Reserve; middle of the month, 9:15am EST, covers previous month data It 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 are being used (commonly known as capacity utilization). In addition, the Capacity Utilization Index provides an estimate of how much factory capacity is in use. They are important indicators, as the manufacturing sector accounts for one-quarter of the economy.
[M] Initial Jobless Claims
Department of Labor; once a week on Thursday at 8:30am EST, covers previous week data
The data states the number of people who applied to receive unemployment pay for the first time. It has low to medium importance as this relates to weekly data with high fluctuations; the average of four weeks is more stable.
[M] Philadelphia Fed Index (Business Outlook Survey)
Federal Reserve Bank of Philadelphia; around the 17th of each month, 10:00am EST, covers previous month data
The Business Outlook Survey is a monthly survey of manufacturers located around the states of Pennsylvania, New Jersey and Delaware. Companies surveyed indicate the direction of change in their overall business activity and in the various measures of activity at their plants. The index signals expansion when it is above zero and contraction when below. This index is considered to be a good indicator of changes in everything from employment, general prices, and conditions within the manufacturing industry. It isn’t a big market mover, but the results found in the survey can indicate what to expect from the Purchasing Managers’ Index (which comes out a few days later and covers the entire U.S.).
[M] PPI – Producer Price Index; Core-PPI
Bureau of Labor and Statistics; the second full week of each month, 8:30am EST, covers previous month data
The PPI is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. This indicator reflects the change of manufacturers’ cost of input (raw materials, semi-finished goods, etc.). Formerly known as the “Wholesale Price Index”, the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers. Each month
approximately 100,000 prices are collected from 30,000 production and manufacturing firms. It is not as strong as the CPI in detecting inflation, but because it includes goods being produced, it is often a forecast of future CPI releases.
[L] Beige Book
Federal Reserve Board; two Wednesdays before every FOMC meeting, 8 times per year, 2:15pm EST
Beige book is the commonly used term for the Fed report entitled: “Summary of Commentary on Current Economic Conditions by Federal Reserve District”. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting. This report is published eight times per year. The Beige Book is not considered to be a big market mover. It is a gauge of the strength of the economy and not a commentary on the views of Fed members. Occasionally it can move markets if the findings are substantially different from analyst expectations.
[L] ECI – Employment Cost Index
Bureau of Labor and Statistics; the last Thursday of Apr, Jul, Nov and Jan, 8:30am EST; covers previous quarter’s data
The ECI tracks movement in the cost of labor which includes wages, fringe benefits, and bonuses for employees at all levels of involvement The Bureau of Labor surveys over 3,000 private sector firms and over 500 local governments, schools and other public sector organizations. This indicator is not widely watched, but it is among a select group of indicators that have enough power to move the markets. This is particularly true in inflationary times. The idea behind the ECI is that as wage pressures increase, so does inflation. This is mainly because compensation tends to increase before companies increase prices for consumers (inflation).
[L] PCE – Personal Consumption Expenditure
BEA (Bureau of Economic Analysis); last day of each month, 8:30am EST, covers previous month data
PCE measures price changes in consumer goods and services. The PCE is a fairly predictable report that usually has little impact on the markets. The Core PCE, which is the index less prices of food and energy, estimates inflationary trend more precisely.