Fundamental Economic Reports: Major Market Movers !!!

The following Economic Reports are the most closely followed Economic Report in the FX trading market. These reports will cause volatility once they are announced, meaning there will be some pip movement in currency pairs after these news reports are announced. The amount of pip movement will depend on the volatility rating of each news reports, news marked with importance of 3 exclamation marks cause high volatility, followed by those of 2 exclamation marks and then those of 1 exclamation mark.

Most investors will mainly trade 3 and 2 exclamation mark news, as these reports will generally cause between 30 and 100 pip movement once these news reports are announced.

The news reports followed by traders are shown below and reports of these news can be found within an Financial Economic Calendar.

Employment Report

• Importance: !!!
• Source: Bureau of Labor Statistics, U.S. Department of Labor.
• Release Time: First Friday of the month at 8:30 EST, reports data for the prior month

The employment report survey produces the Non-Farm payrolls, Average Work Week, and Average Hourly Earnings figures, to name a few. Both surveys cover the payroll period.

Non-Farm Payrolls The single most important piece of data contained in the employment report generally and the establishment survey specifically is Non-Farm Payrolls. As the name implies, Non-Farm Payrolls measure the number of people on the payrolls of all non-agricultural businesses. The monthly changes in payrolls can be quite volatile, occasionally varying by more than 200K from one month to the next. Non-Farm Payrolls figures offer the most timely and comprehensive snapshot of the economy, these is a measure of American Middle Class and this figure translates to people with money and are ready to spend. American economy is highly fueled by consumerism with about 75% of GDP driven by consumers, the higher the Non-Farm Payrolls number the more the consumers.

Average Work Week The Work Week, also referred to as hours worked, is an often under rated indicator in the establishment survey. The average number of hours worked by employees on Non-Farm Payrolls is an important determinant of both industrial production and personal income in any given month.

Average Hourly Earnings The last indicator from the establishment survey which is worthy of close inspection is Average Hourly Earnings, which is important for two reasons. Alongside total man-hours, the average earnings figure gives us a good indication of personal income growth during the month. Second, the earnings figures are closely watched during periods of strong economic growth for evidence of increasing wage pressures.

Unemployment Rate

Unemployment Rate - Percentage of employable people actively seeking work, out of the total number of employable people determined in a monthly survey by the Bureau of Labor Statistics.

An unemployment rate of about 4% - 6% is considered "healthy". Lower rates are seen as inflationarydue to the upward pressure on salaries; higher rates threaten a decrease in consumer spending.

Jobless Claims

Jobless Claims - A weekly compilation of the number of individuals who filed for unemployment insurance for the first time. This fundamental indicator, and more importantly, its four-week moving average, portrays the employment situation in the labor market.

Jobless claims are an easy way to gauge the strength of the job market. The fewer people filling for unemployment benefits, the more the people having jobs, and that tells investors a great deal about the economy.

Nearly every job comes with an income which gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so the stronger the job hiring, the healthier the economy.

By tracking the number of jobless claims, investors can gain an insight of how the job market is performing. If wage inflation threatens, it’s a good bet that interest rates will rise, bond and stock prices will fall, and the only investors who will be in a good mood will be those ones that tracked jobless claims and adjusted their portfolios to anticipate these events. The lower the number of unemployment claims, the stronger the job hiring is, and vice versa.

Gross Domestic Product - GDP

• Importance: !!!
• Source: Bureau of Economic Analysis , U.S. Department of Commerce.
• Release Time: Third or fourth week of the month at 8:30 EST for the prior quarter

Gross Domestic Product (GDP) is the broadest measure of economic activity. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. The figures can be quite volatile from quarter to quarter. Inventory and net export swings in particular 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, totaling two thirds of the GDP.

Retail Sales report

• Importance: !!!
• Source: The Census Bureau of the Department of Commerce.
• Release Time: 8:30 EST around the 13th of the month (data for one month prior).

The retail sales report is a measure of the total receipts of retail stores. The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns. Retail sales are often viewed ex-autos, because auto sales can vary sharply from month-to-month. It is also important to keep a close watch on the gas and food components, because changes in these 2 reports are often a result of price changes rather than shifting consumer demand.

Retail sales can be quite volatile and the advance reports are subject to rather large revisions. Retail sales do not include spending on services, which makes up over half of total consumption. Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.

Housing Starts and Building Permits

• Importance: !!!
• Source: The Census Bureau of the Department of Commerce
• Release Time: 8:30 EST around the 16th of the month (data for one month prior).

Housing Starts are a measure of the number of residential units on which construction has begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Building permits are permits taken out in order to allow excavation. An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates. Permits lead the starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.

Existing Home Sales

• Importance: !!
• Source: The National Association of Realtors.
• Release Time: 10:00 EST around the 25th of the month (data for month prior).

The name speaks for itself - this report provides a measure of the level of sales of existing home sales. The report is considered a decent indicator of activity in the housing sector. Housing starts precede this report each month, but starts are a supply rather than demand-side indicator. Existing home sales precede the other key demand-side indicators of housing - new home sales - thus boosting the visibility of this report. Sales are highly dependent on mortgage rates, and will tend to react with a few months lag to changes in rates. Sales are also determined by the level of pent-up demand for housing - immediately after a recession, sales are typically quite strong due to the demand which accumulated through the recession.

Chicago PMI

• Importance: !!!
• Source: Chicago Purchasing Managers Association.
• Release Time: Last business day of the month at 10 EST for the current month.

Philadelphia and Chicago surveys are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.

Trade Balance

This is statement of a country’s trade in goods (merchandise) and services. It covers products such as manufactured goods, raw materials and agricultural goods, as well as travel and transportation.

It is the difference between the value of the goods and services that a country exports and the value of the goods and services that it imports.

If a country’s exports exceed its imports, it has a trade surplus and the balance is said to be positive. If imports exceed exports, the country has a deficit and its trade balance is said to be negative.

A positive or negative balance may simply reflect a change in the relative cost of domestic products compared with international prices. For industries that rely heavily on exports, like the auto sector, a positive balance may reflect a higher international demand, which can mean more jobs in that industry.

Purchasing Managers Index (PMI)

Purchasing Managers Index (PMI) - The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders.

It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI)

Producer Price Index (PPI) - PPI is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers.

The PPI measures price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output.

Inflation at this producer level often gets passed through to the consumer price index (CPI).

The relationship between inflation and interest rates is the key to understanding how data like the PPI influence the markets and your investments.

Philadelphia Fed Survey

Philadelphia Fed Survey - A composite diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district.

This survey is widely followed as an indicator of manufacturing sector trends since it is correlated with the ISM survey and the index of industrial production.

The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on currency prices behavior.

Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation.

Personal Income

Personal Income - Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and non-durable goods and services.

The income and outlays data are another handy way to gauge the strength of the economy and where it is headed. Income gives households the power to spend and/or save.

Spending greases the wheels of the economy and keeps it growing. The consumption (outlays) part of this report is even more directly tied to the economy, which we know usually dictates how the markets perform.

Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed. Needless to say, that’s a big advantage for investors.

New home sales

New home sales - The number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends.

This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling comfortable and confident in their own financial position to buy a house.

Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments.

By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy.

Once the home is sold, it generates revenues for the home builder and the realtor. Trends in the new home sales data carry valuable clues for the stocks of construction builders, mortgage lenders and furnishings companies.

Money supply

Money supply - The monetary aggregates are alternative measures of the money supply by degree of liquidity. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures.

The monetary aggregates (know individually as M1, M2 and M3) used to be all the rage a few years back because the data revealed the Fed’s (tight or loose) hold on credit conditions in the economy.

The Fed issues target ranges for money supply growth. In the past, if actual growth moved outside those ranges it often was a prelude to an interest rate move from the Fed.

Today, monetary policy is understood more clearly by the level of the federal funds rate. Money supply fell out of vogue in the nineties, due to a variety of changes in the financial system and the way the Federal Reserve conducts monetary policy.

The Fed is working on some new measures of money supply, and given the way economic indicators ebb and flow in popularity, don’t be surprised if the monetary aggregates make a comeback in the future.

International Trade

Measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade.

Changes in the level of imports and exports, along with the difference between the two (the balance) are a valuable gauge of economic trends here and abroad. Furthermore, the data can directly impact all the financial markets, but especially the forex value of the dollar.

Imports indicate demand for foreign goods and services here and the US exports show the demand for US goods in overseas countries. The dollar can be particularly sensitive to changes in the deficit run by the United States, since this imbalance creates greater demand for foreign currencies.

This report gives a breakdown of US trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.

Industrial production and capacity utilization

Industrial production and capacity utilization - The Index of Industrial Production is a chain-weight measure of the physical output of the nation’s factories, mines and utilities.

The capacity utilization rate reflects the usage of available resources. Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform.

Industrial production show much factories, mines and utilities are producing. Since the manufacturing sector accounts for one-quarter of the economy, this report has a big influence on currency price behavior.

The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85%) it can lead to inflationary bottlenecks in production.

The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures.

Housing starts

Housing starts - Housing starts measure the number of residential units on which construction is begun each month. Home builders don’t start a house unless they are fairly confident it will sell upon or before its competition.

Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new house is started, construction employment rises and income will be pumped back into the economy.

Construction Spending

Construction Spending - Dollar value of the new construction activity on residential, non-residential and public projects. Data are available in nominal and real (inflation-adjusted) dollars.

Businesses only put money into construction of new factories or offices when they are confident that demand is strong enough to justify the expansion.

The same goes for individuals making the investment in a home. That’s why construction spending is a good indicator of the economy’s momentum.

Consumer Confidence Index

Consumer Confidence Idex - Survey of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by The Conference Board. Five thousand consumers across the country are surveyed each month.

The level of consumer confidence is directly related to the strength of consumer spending. Consumer spending accounts for two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future.

The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.

With this in mind, it’s easy to see how this index of consumer attitudes gives insight to the direction of the economy. Changes in consumer confidence and retail sales don’t move in tandem month by month.

Consumer Price Index (CPI)

Consumer Price Index (CPI) - Measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

The CPI is the most followed indicator of inflation in the United States. Inflation is a general increase in the price of goods and services. The relationship between inflation and interest rates is the key to understanding how data like the CPI influence the markets.

By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.

Durable goods order

The durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hardwoods. Orders for durable goods show busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provides insight to demand for things like refrigerators and cars, but also business investment going forward.

If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation. It tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.

Existing home sales

Existing home sales - Number of previously constructed homes with a closed sale during the month. Also known as home resales) are a large share of the market than new homes and indicate housing market trends. This provides a gauge of not only the demand for housing, but the economic momentum.

People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Even though home resales don’t always create new output, once the home is sold, it generates revenues for the realtor.

Gross Domestic Product (GDP)

The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country’s economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth. Investors need to closely track the economy because it usually dictates how investments will perform.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components like consumer spending, business and residential investments and price (inflation) indexes illuminate the economy’s undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Retail Prices Index

Retail Prices Index (RPI) - The RPI is the UK’s principal measure of consumer price inflation. It is defined as an average measure of change in the prices of goods and services brought for the purpose of consumption by the vast majority of households in the UK.

It is complied and published monthly. Once published, it is never revised. RPI includes date on food and drink, tobacco, housing, household goods and services, personal goods and services, transport fares, motoring costs, clothing and leisure goods and services.

Measures of inflation are vital tools for economists, business and government. The Bank of England’s Monetary Policy Committee sets UK interest rates on the basis of a target figure for inflation set by Chancellor of the Exchequer.

Wage agreements, pensions and change in benefit levels are often linked directly to the RPI. Utility regulators impose restrictions on price movements based on the RPI.