How economic indicators affect financial markets -Sandeep Kanao
Traders are always trying to understand the factors that cause the market to rise and fall. The truth is that there are a multitude of factors, and millions of investors make decisions that impact the market every day. Corporate earnings and news, political news, and general market sentiment can all move the market.
Which economic indicators affect financial markets and how they affect forex markets - Sandeep Kanao
A/ INFLATION
Inflation is a significant indicator for securities markets because it determines how much of the real value of an investment is being lost, and the rate of return you need to compensate for that erosion. For example, if inflation is at 3% this year, and your investment also increases by 3%, in real terms you have just managed to stay even.
If the rate of inflation increases, then the disposable income people have to buy things with is reduced more quickly. This can have a negative effect on an economy and hence the currency.
However, if a country experiences deflation, i.e. prices actually fall, investors could also see this as an indicator that the economy is performing poorly. Therefore, this can also have a negative effect on the value of a currency.
A central bank will therefore try to target an acceptable level of inflation – for example, an inflation level between 2–3%.
If the inflation rate is reported to be within the target range, the currency value does not tend to react very much. The currency value reacts much more if the inflation rate is drastically outside this range.
B/ GROSS DOMESTIC PRODUCT (GDP)
GDP tells you how fast the economy is growing (or contracting). GDP is the dollar value of all goods and services produced by a given country during a certain period.
Any significant change in the GDP, either up or down, can have a big effect on investing sentiment.
If the GDP growth rate is high, then the economy is considered to be robust and the currency will likely appreciate in value. If the GDP growth rate slows, then this can be seen as a weakening economy and the currency is likely to depreciate.
C/ PER CAPITA GDP
A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries. A rise in per capita GDP signals growth in the economy and tends to translate as an increase in productivity
D/ GDP - PPP (Purchasing power parity)
Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar). This is a comparative (and theoretical) exchange rate, the only way to directly realize this rate is to sell an entire CPI basket in one country, convert the cash at the currency market rate & then rebuy that same basket of goods in the other country (with the converted cash).
E/ THE LABOR MARKET
Another major factor influencing the economy is the labor market. The key indicators most investors focus on here are total employment and the unemployment rate.
Low unemployment rates mean a strong economy, which increases the demand for the currency.
F/ ECONOMIC GROWTH OUTLOOK
Government agencies, as well as investment banks and economic think tanks, publish growth outlooks – an estimate of what they think the future GDP will be.
Growth outlooks give investors and traders guidance by providing an estimate of the future GDP. If growth outlook is reduced, the currency will fall; if growth outlook is raised, the value of the currency will appreciate.
G/ RETAIL SALES
Consumer spending can account for a majority of an economy. If it does not account for the majority, it still generally makes up a substantial proportion of it, and so retail sales data is an important indicator. Retail sales measure the total amount of consumer spending in a given month across various sectors, such as electronic retailers, restaurants and car dealerships, to name a few.
H/ HOME SALES
The housing market is one of the most visible signs of strong growth in the economy. Home sales are measured by:
•New home sales
•Pending home sales
•Housing starts
•Building permits
Strong retail sales means consumers are confident in the economy and have more money to spend, therefore having a positive effect on the currency.
Home sales rise and fall based on consumer confidence, mortgage rates and the general strength of the economy. A strong housing sector is therefore positive for the currency.
I/ TRADE BALANCE - Sandeep Kanao
The trade balance report gives details on the amount of imports and exports for a country over a given period. A trade deficit is negative for the value of a currency, while a trade surplus is positive for a currency.
The biggest influencers of market movements are, of course, the announcements and policies made by a country’s central bank and the important monetary authorities about
interest rates
Raising the interest rate curbs inflation and lowering the interest rate promotes economic growth.
High interest attract capital and so higher interest rates increase demand for a currency and the value rises.
Government spending is referred to as fiscal policy. It is usually a prominent way of stimulating the economy and can be a potent tool when looking to deal with a recession. If a country has a loose fiscal policy, this can cause the value of the currency to rise.
