Why the Economic Data Matters to Traders – Introduction
As traders, we are constantly on the receiving hand when it comes to data. Every day, we receive a myriad of data ranging from jobs numbers to economic growth numbers to inflation. Often, most people ask me why all this data matters. In this article, I will highlight the different types of data and why traders should pay close attention to them.
I will start with a theoretic question. Assume you won a lottery of $1 million. To receive the money, the sponsors of the lottery ask you to invest in either United States or Zimbabwe. To give a context, United States is the most developed country on earth while Zimbabwe is among the poorest. In the latter, most people don’t have jobs and the situation seems dim by the day.
As a person with common sense, which country would you invest in? Zimbabwe or United States? I assume, you would invest in the United States.
Now, assume the two countries were the United States and Norway. These are two rich countries. In this situation, you will be torn to select because of their growth and prosperity. To make a decision, you will look at the rate of growth and the direction of the country.
Traders ask these questions on a daily basis. They want to know the best countries to allocate their hard-earned money. To decide on the countries, stocks, and currencies to invest in, they weigh all these facts.
The jobs number is one of the most important. Every month, agencies in the developed countries compile the number of people who get and lose jobs. They also compile the rate of wage growth. By compiling this data, they are able to present a picture to investors whether the economy is doing good or not. An economy that is adding jobs is ideal to most investors because it creates more people with higher purchasing power.
Another important data is on inflation. As you possibly know, the role of the Central Bank is to ensure the stability of the financial system and to ensure the stability of inflation. An inflation is a period of increased consumer prices. To control or trim inflation growth, central bankers hike interest rates. Therefore, when the inflation data comes out, investors are able to figure out the direction of the central bank on monetary policy.
Investors pay close attention to manufacturing data. This is because when the manufacturing industry is doing well, the economy tends to do well as well. As a personal investor with your lottery winnings, you are likely to invest in a country with a flourishing manufacturing industry.
In all data sources, investors point to interest rates. When inflation disappoints, investors assume that the central bank will be unlikely to hike rates. An higher rate of inflation leads investors to assume that the central banks will move in to hike rates.
Certain investors love higher interest rates. For example, if you are bullish on the dollar, chances are that you will love getting a yield from the dollar. Therefore, you should pay attention to the actions of the central banks about their interest rates decisions.
Why the Economic Data Matters to Traders – Useful Tips: