Economic Data Often Drives Capital Markets

Macro changes to economic circumstances are a significant driver of the flow of money throughout the globe. As economic information is released to market participants and investors absorb new information their wiliness to commit capital to specific areas changes. Global macro changes can cause specific influences to certain securities such as currency pairs, sovereign debt, commodities and equities indices.

World Economic Data

The most common economic changes are those released by governments throughout the globe. Most governments release data on growth, unemployment, retail sales, as well as manufacturing. For example, on Thursday’s the US releases its weekly jobless claims report. Investors look at this weekly release as a gauge of employment activity within the United States. As the number of initial jobless claims declines, the employment situation theoretically becomes more sustainable as fewer individuals are requiring employment benefits from their country.

US Economic Data and Impact on the Markets

Equity markets in the US generally benefit when stronger than expected data is release, causing riskier assets such as stocks to rise when unemployment, as reflected by the jobless claims numbers, decreases. On Thursday May 9, the U.S. Department of Labor released jobless claims which declined by 4,000 to 323,000 in the latest week. Expectations were for a small rise to 335,000. The surprise release buoyed stocks generating additional positive sentiment. Additionally the four-week moving average for jobless claims fell by 6,250 to 336,750.

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As seen from the chart, jobless claims are at their lowest levels seen in the past year, and with an unemployment rate at 7.5%, investors might believe there are further gains to be made to the US employment situation.

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After the release of this employment data point, the S&P 500 index climbed to new all-time highs (as the above chart, (courtesy of Bullion Vault)). Investors used this new piece of information to purchase a global index, in the hopes that better economic data will continue to drive capital into US equities.

Another type of macro data point that investors evaluate are changes or the lack of changes to monetary policy. For example, changes to monetary policy can occur when a central bank meets to determine the fate of interest rates. On Thursday May 9, the Bank of England finished its two day meeting in which the MPC discussed changes to interest rates based on the current economic situation.

Although a couple of member of the central bank’s policy committee believe that the Bank of England should reduce rates and increase their quantitative easing program, the majority of the group did not want to make any changes to rates, as they believed economic conditions did not warrant such as change.

After the interest rate decision which showed now change in interest rate, the short end of the UK sovereign debt curve sold off. This area of the interest rate curve is referred to as short sterling and measures market participants estimate for future short term interest rates. A selloff reflects an increase in future estimate of short term interest rates.

Economic data provides investors with new information on a daily basis. This type of data can quickly alter the movement of financial securities that are sensitive to changes in economic conditions.

Guest post by Marcus Holland, editor of options trading education website – options-trading.com.

Comments

    • says

      Roger, yes, fear and greed lead to market excesses and in some ways also influences the central banks’ policy decision. Wish it were not so, but then we would be entering the Efficient Markets realm and would not have Graham and Buffett …

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