In my previous article, I provided a detailed explanation on the role of fundamental analysis in the financial market. I specifically advised all investors and traders to pay close attention to the economic calendar and the key information that it provides. In this article, I will provide an in-depth analysis on the main economic data that one should always focus on when trading.
Interest Rate Decision
In his short documentary on how the economic machine works, billionaire Ray Dalio explained the role of interest rates in the market. When the interest rates are low, people and businesses take credit and buy more. This fuels inflation which has an impact in the financial market. Therefore, to curb inflation and stabilize the currency, the Federal Reserve increases the interest rates. This data is specifically very important in the financial market because it indicates the economic environment. In the United States, the Federal Open Market Commission (FOMC) is the body mandated to revise the interest rates. As a trader, you need to always have in mind the date when the interest rate decision is to be made. It is advisable to avoid the market because no one really knows how the market will react. In addition, it is important to stay on top by always checking the minutes of the regulatory body and listening to their speeches. In America, the FOMC is expected to tighten (increase the base lending rate) any time this year depending on the economic data. In addition, it is important to always be alert because some countries may abruptly change their interest rates. A few days ago, the New Zealand Central Bank suddenly reduced their base lending rate leading to the fall of the New Zealand Dollar.
Consumer spending (measured by Consumer Price Index) is a very important measure of inflation because it indicates the purchasing power of the consumers. Inflation is therefore correlated with the purchasing power of a currency against its peers. As stated above, inflation is also tied with the interest rates. An increase in inflation can therefore lead to the tightening of the monetary policy which leads to increased appetite of the currency. Therefore, it is very important to look pay a keen interest on the CPI data which is released by the Bureau of Statistics in the USA.
The United States Bureau of Labor releases the employment change data on a monthly basis. This data is important because it highlights the overall health of the economy. If the economy adds more jobs, investors take it as a positive note that the economy is improving. On the other hand, if the economy sheds jobs, then this is an indication that the economy is not doing well. Investors look at the overall health of the numbers as well as the wages. As a trader, you should always take note of the day and time when this data will be released and probably avoid the market at this time.
The GDP (Gross Domestic Product) is the most commonly used data to indicate the health of the entire economy. This data represents the market value of all goods and services in a country during the year. A growing GDP indicates a strong economy and a reducing GDP shows a weak economy. Investors always want to be engaged in a country that is doing well economically. Therefore, as a trader, you need to always have a look at the GDP figure and the rate of growth (or shrinkage). As a lagging figure, you should look at the advance report and the preliminary report.
The retail sector is a very important in the financial market. An increase in retail sales is an indicator that the economy is doing well. The data is very important to investors because it measures the overall strength of consumer spending and the effectiveness of the retail stores. The report is released on a monthly basis and is also an indicator of the performance of lagging indicators such as the GDP.
Data on investor activities is also very important in the economy. Contrary to the popular belief that the best time to buy is during a bullish run, the fact is that it is always best to buy when everyone is selling. Buying at this time will give you a chance to buy valuable companies and instruments at a very fair price. The data on investor activities can be found in various filings.
Balance of Payments
This is an indicator between the amount of money received from outside countries and the amount of money leaving the country. In many cases, this represents a balance between the imports, exports, and payment transfers. A positive trade balance is realized when the amount of money coming exceeds the one that is leaving. This data is available in the economic calendar.
There are many other indicators published by government and private agencies. As a trader, it is very important to be aware of the data, the trend and the best approach to enter, leave or stay in the market. From personal experience, I recommend that you stay out of the market when the data is released to reduce the amount of exposure to volatility.