29 June 2012
If you watch financial television or if you read financial publications like The Wall Street Journal, Investor's Business Daily or the many financial blogs out there, you notice that there is a seemingly endless amount of economic reports being released.
The truth is that many of these reports have little value to the individual investor. Judging by the market reaction when the reports are released, even the most sophisticated investors don't see most of the data as something that would change their investing or trading actions in the near future.
However, there are some reports that are market movers. Good traders know which reports to watch and when the reports are released to the public. Here are five economic reports you should watch.
Nonfarm Payroll
The monthly nonfarm payroll (NFP) report is released on the first Friday of each month and represents the total number of paid employees in the United States. Farm employees, private household, government employees and those who work for nonprofits are not counted in this number.
The truth is that many of these reports have little value to the individual investor. Judging by the market reaction when the reports are released, even the most sophisticated investors don't see most of the data as something that would change their investing or trading actions in the near future.
However, there are some reports that are market movers. Good traders know which reports to watch and when the reports are released to the public. Here are five economic reports you should watch.
Nonfarm Payroll
The monthly nonfarm payroll (NFP) report is released on the first Friday of each month and represents the total number of paid employees in the United States. Farm employees, private household, government employees and those who work for nonprofits are not counted in this number.
Along with the NFP report, the unemployment figure is released and these two data points are used by economists, investors and politicians to gauge the overall health of the U.S. economy. It is the single largest market mover of any economic report each month.
Although some people doubt the validity of the data, traders know that on "jobs Friday" the market may move violently in either direction. Traders often set up for this anticipated movement in the days prior to the data release. Regardless of the validity of the data, the fact that it will move the market makes the report important, both in the stock market and in the forex world.
Producer Price Index
Producer price index (PPI), measures the amount a seller receives for his or her products and it is used as an indicator of the health of the wholesale or producer market. What a purchaser pays for a product versus what a seller receives isn't the same because of government subsidies, distribution costs and sales and excise taxes.
Because the PPI is released only a few days before the consumer price index (CPI), traders use the PPI number as a predictor of the CPI number since producers that are paying higher prices will pass those prices on to the consumer.
Consumer Price Index
The CPI examines the weighted average of prices for a basket of goods and services, and is the most widely used indicator of inflation. Inflation is measured by averaging the amount of price change for commonly used products in regions across the country. When CPI rises dramatically in a short period of time, inflation is said to be higher. When it falls, a period of deflation is taking place.
CPI is not only used by investors and traders to measure the buying power of consumers, but it is also used to make adjustments to pensions, Medicare and other cost of living metrics, as well as some treasury rates.
Case-Schiller
The S&P Case-Schiller Home Price Index measures the average selling prices of homes in different areas of the country as well as the national average. Not only is this data used by investors to gauge the health of the real estate market, it is also used by the Chicago Mercantile Exchange (CME) to price housing futures and options.
Although some people doubt the validity of the data, traders know that on "jobs Friday" the market may move violently in either direction. Traders often set up for this anticipated movement in the days prior to the data release. Regardless of the validity of the data, the fact that it will move the market makes the report important, both in the stock market and in the forex world.
Producer Price Index
Producer price index (PPI), measures the amount a seller receives for his or her products and it is used as an indicator of the health of the wholesale or producer market. What a purchaser pays for a product versus what a seller receives isn't the same because of government subsidies, distribution costs and sales and excise taxes.
Because the PPI is released only a few days before the consumer price index (CPI), traders use the PPI number as a predictor of the CPI number since producers that are paying higher prices will pass those prices on to the consumer.
Consumer Price Index
The CPI examines the weighted average of prices for a basket of goods and services, and is the most widely used indicator of inflation. Inflation is measured by averaging the amount of price change for commonly used products in regions across the country. When CPI rises dramatically in a short period of time, inflation is said to be higher. When it falls, a period of deflation is taking place.
CPI is not only used by investors and traders to measure the buying power of consumers, but it is also used to make adjustments to pensions, Medicare and other cost of living metrics, as well as some treasury rates.
Case-Schiller
The S&P Case-Schiller Home Price Index measures the average selling prices of homes in different areas of the country as well as the national average. Not only is this data used by investors to gauge the health of the real estate market, it is also used by the Chicago Mercantile Exchange (CME) to price housing futures and options.
Some investors believe the Case-Schiller data isn't an accurate representation of home prices since some markets like New York City and Los Angles are so vast that more than one real estate market may be at work. This makes a single number for these markets inaccurate.
Fed Announcements
When the Federal Reserve makes an announcement, normally through the minutes of a recent meeting, the market listens and responds. Investors watch for interest rate announcements or, as is the case right now, any indication of QE3, or a third round of quantitative easing. In most cases, these announcements aren't large market movers, but when new information is expected all investors listen intently at what the Fed has to say. New information always moves the market, but Fed statements are often very similar to the previous month's announcement.
The Bottom Line
Although many economic data points are interesting only to the economists, investors and traders may use these announcements as a gauge to measure the health of different sectors of the economy. Long-term investors should not use these data as a reason to change their investing thesis unless numerous reports show a concerning trend.
Fed Announcements
When the Federal Reserve makes an announcement, normally through the minutes of a recent meeting, the market listens and responds. Investors watch for interest rate announcements or, as is the case right now, any indication of QE3, or a third round of quantitative easing. In most cases, these announcements aren't large market movers, but when new information is expected all investors listen intently at what the Fed has to say. New information always moves the market, but Fed statements are often very similar to the previous month's announcement.
The Bottom Line
Although many economic data points are interesting only to the economists, investors and traders may use these announcements as a gauge to measure the health of different sectors of the economy. Long-term investors should not use these data as a reason to change their investing thesis unless numerous reports show a concerning trend.
No comments:
Post a Comment