Nearly every day, a new economic report is released. Some of these reports can rock the market and, if you don’t know what to expect, your portfolio as well. However, studying the most important reports and following a few guidelines can help keep your trades on a steady course.
One of the most useful measures in determining the direction of the Federal Reserve’s fiscal policy is the Consumer Price Index (CPI), released monthly by the U.S. Bureau of Labor Statistics. The CPI reports changes in the prices paid by urban consumers for a representative basket of goods and services. Changes in the CPI represent the rate of inflation and help the Fed to formulate its fiscal policy. CPI also is used as a deflator of other economic series such as retail sales and hourly and weekly earnings and as a means of adjusting dollar values. Andrew Wilkinson, senior market analyst at Interactive Brokers, says the CPI is the most likely report to move a market, and, along with Gross Domestic Product (GDP), is the most important economic report. Traders also watch the Producer Price Index (PPI), which deals with prices at the producer level. The PPI, also released monthly by the Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output. The government has instituted several changes over the year in how it compiles its data, particularly the CPI, that many analysts believe have weakened its ability to provide realistic economic measures (see “Futures Interview”). While many reports are skewed, there are still many useful reports (see “So who can I trust?”).
The broadest measure of economic activity is the quarterly GDP, released by the Bureau of Economic Analysis. GDP is an aggregate measure of complete economic activity. This report comes out in three stages: advance, preliminary and final. Ashraf Laidi, chief FX strategist at CMC Markets, says traders should pay more attention to the advance and preliminary reports because the final comes out three months after the quarter has ended.
The employment situation report, released on the first Friday of each month by the Bureau of Labor Statistics, is of particular significance and is the likeliest report to lead to violent market swings if there are any surprises (see “The third rail”). Trading floor personnel have pejoratively referred to the jobs announcement as “unenjoyment day” for its tendency to lead to wild swings and potential execution errors. The employment report includes the number of people unemployed as a percentage of the labor force, nonfarm payroll figures and figures on the average work week. The hourly earnings component is of particular significance as many analysts rely on it as a measure of inflation. Chicago Board of Trade member Jack Broz says that as a day-trader, only the nonfarm payrolls generally influence him. “I will expect the Thursday before [the report] to be poor (slow or choppy), and I won’t trade the overnight session prior to it because there probably won’t be any trade,” he says. Nonfarm payrolls is the most important component of the report. Wilkinson says, “Unemployment is key because [it will help indicate] how deep the current recession is.”
In addition to the monthly report, the Labor Department puts out the unemployment insurance weekly claims report, which measures the number of citizens filing for unemployment benefits over the past week. This report can move the market, but usually not dramatically.
Because job losses can affect spending, analysts note that retail sales reports, released monthly by the Census Bureau, can become more relevant when unemployment increases. Wilkinson says, “We want to know whether any negative movement in the employment reading coupled with the reality of harsh economic times ahead is impacting what people spend, so [employment and retail sales] are the key drivers of the moment.” He says GDP is taking a backseat because it comes out less frequently and “most people know we’re in a recession, so [people are paying more attention to] the here and now.”
Laidi says that in the current economic environment “the make-or-break right now is the consumer,” which puts added emphasis on reports that have to do with spending like retail sales and the Personal Consumption Expenditures report (PCE). He says the core PCE Price Index year over year is the Fed’s favorite inflation measure.
With oil prices at record levels, the weekly oil inventory reports from the Energy Information Administration (EIA) are becoming more important too. “Go back five years and they didn’t matter. Today, they’re really important because they seem to fuel a bull market in the energy sector,” Wilkinson says. Housing numbers, like building permits, housing starts and new and existing home sales reports released by the Census Bureau, are also coming to the forefront. Paul Smilgius, a trader with Sargis LLC, notes that housing numbers are getting a lot of attention because of the credit crisis, and says “everyone is more sensitive about energy releases now.”
Certain reports gain or lose significance over time. At one time, the trade deficit was followed extremely closely and any slight variation from expectations could lead to huge market swings, but the report is no longer watched as closely. It is important to keep an eye on which reports are garnering the greatest interest by analysts, as their impact likely will be greater.
COMMODITIES
For commodities traders, crop summary and planting intentions reports by the U.S. Department of Agriculture (USDA) can be big market movers. The tightness of supplies is the primary measure used to project prices. Companies such as Lanworth also offer pre-USDA report production estimates for corn, soybeans and wheat, which are designed to be a supplement to USDA reports. Dr. Nick Kouchoukos, director of information services at Lanworth, says the USDA’s late June acreage survey is the most important agricultural report. “The trader gets a huge chunk of information from the USDA in June, and [information on] incremental changes from August to November,” he notes.
The Institute for Supply Management (ISM) Index, a monthly national survey of manufacturing firms, is of particular importance to forex traders. ISM Index readings above or below 50% indicate the expanding or contracting of a particular factory sector. A reading greater than 50% is dollar bullish, and a reading less than 50% is dollar bearish. Laidi says the ISM Index is the most important economic report along with employment and GDP.
Accompanying statements from Fed interest rate decisions and testimony by Fed Chairman Ben Bernanke provide some of the best clues about Fed policy and can be huge market movers. Laidi notes, “When Bernanke wants to send a message, he doesn’t slip it in the fourth page, he puts it in the first paragraph.” Wilkinson says the minutes from the central bank meetings around the world, including the U.S. Federal Reserve, offer “a really good sense of what’s important to an economy. [They’ll] give you a sense about whether the central bank members are worried about something,” and hints into policy action. “If you don’t get a sense of how [central bank members] gauge the overall economy, then you’re really trying to read the map with a blindfold on,” Wilkinson says.
Experts have various strategies on how a trader should adjust his or her trading patterns before a report comes out. Broz says, “I make sure I am flat in the minute or two prior to the release with no working order(s). I need to give all the reports plenty of room, perhaps eight to 10 ticks in bonds and six to seven in notes, and much more for nonfarm payrolls. In Dow, 25-30 ticks usually keeps me safe, perhaps 50 for nonfarm payrolls.”
Several Web sites offer up-to-date expectations for each report (see “Great expectations”). Traders should know what the market is expecting. “If the price decision goes against the direction of the initial price behavior, you want to know how much of a retracement there’s going to be,” Laidi says. “You have to know the previous figure, the expectation and the range. If things are going to be much higher or much weaker than expected, then you have to figure out where you’re going to put your stops.”
He adds that one strategy is to wait until the news is out and the market pops higher or lower, and then go in and trade. Broz looks for excesses in the order flow for a few minutes after the release. “I react to the number, I don’t try to interpret it,” he says. Because of the increased volatility, Smilgius says that there should be a balance between the amount of risk you undertake and that the risk-reward has to be built into the trading model. Wilkinson says, “Make sure you don’t have a position going into the report. Wait to see what happens. Otherwise it’s a pure gamble that you’re going to be right about the data. That’s problematic because you might be right about the data, but you might be wrong about the ensuing price action.”
NEED TO KNOW
You need to know what is expected in the main report and in its components. You also must watch for revisions. The government will revise past reports in its releases. If the market does not react as expected to a certain report, it could be reacting to revisions.
Anyone day-trading or trading from a shorter-term perspective should be flat with no open orders going into the major reports: employment, GDP, CPI and PPI. You are at risk from a number of factors including someone trying to front run a number or someone misreading a number and causing a huge swing. It is not uncommon for violent two-way swings following major reports, which gets you in and gets you stopped out (with possibly huge slippage) all in less than a minute (see “The third rail”). It is important to know when a report will be released and what the expectations are (see www.futuresmag.com/economicreleases). And don’t trust single or dated sources for determining expectations, as they will change up until the report is released. The most important asset for a trader is information, so make sure that you are not at an informational disadvantage.
