Why the Economic Data Matters to Traders (and Which Ones)

Data, data and more data. A trader spends a lot of his time doing research

For a trader there are many important economic trading data to monitor before starting a trade (we also recommend you to check this checklist). Every day, we receive a myriad of data ranging from jobs numbers to economic growth numbers to inflation.

Often, most people ask why all this data matters. In this article, We will highlight the different types of data and why traders should pay close attention to them.

» Related: 4 Things to Consider when selecting Financial Asset to Trade

Why all this data matters?

We want to 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? We 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.

How to find these Economic numbers

The easiest way of finding these numbers is to use the economic calendar. This is a free tool provided by most platforms like Investing.com and Dailyfx that show you when economic numbers will come out.

As a day trader, you should ensure that you look at the calendar on a daily basis. Other calendars that will help you are the earnings calendar, dividend calendar, and splits calendar among others.

Types of economic data

Jobs Number

The jobs number is one of the most important, as we mentioned above. 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.

The US usually publishes its employment numbers every first Friday of the month. These numbers show the total number of jobs created, the unemployment rate, the participation rate, wages, and the number of hours workers.

Employment numbers are also important because they form the mandate of the Federal Reserve. The Fed is given the task of maintaining low unemployment rate and stable inflation. Therefore, bad jobs numbers tend to signal that the Fed will maintain a dovish stance.

Inflation

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.

» Related: A Review of Global Central Bank Actions

Manufacturing Data

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.

Interest Rates

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.

Housing data

Another important economic data to watch when trading is on the housing market. These numbers are important because housing is part of investments and consumer spending, which are two of the biggest constituents of the GDP calculation.

In the United Staes, the top housing data to watch are existing home sales, building permits, existing home sales, new home sales, and pending home sales numbers.

Building permits show whether there is an appetite for investments in an economy. Still, housing starts are viewed as more accurate indicators because they show housing projects that have already started. Home sales numbers show the appetite of houses in the economy.

Retail sales

The retail sector is important for two main reasons. First, this sector is the biggest employer in the country. Indeed, companies like Walmart, Amazon, and Home Depot are among the biggest employers in the country. Second, consumer spending is the biggest part of the economy.

Therefore, more retail sales are usually signs that the economy is doing relatively well. The US usually releases retail sales every month.

Summary

There are other important numbers that have an impact on the stocks and currencies. Some of those we have ot mentioned are home price index (HPI), industrial production, COT reports, and construction numbers.

External resource about Economic Data

  • How to Use Data from Economic Indicators in Trading - Dummies.com

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