Whether you follow fundamental trading methodologies in your trading, or whether you’re a dyed-in-the-wool technical analyst, the most significant triggers in your trading are calendar events. So, what exactly is the economic calendar and which numbers are the most important?
Many traders treat the global economic calendar as another trading tool. This is hardly surprising as the advent of new economic data is what drives significant market action. Movements in anticipation of a particular economic indicator, and more likely, after one is released are what make traders work for their money.
As the world has become one global, connected village, so interest in economic data from every country on the globe has increased. As in chaos theory, when the flap of a butterfly’s wing can cause a hurricane on the other side of the world, so one financial indicator in one country can have a ripple effect in the whole world economy.
The critical aspect of any trade is timing. A miss is as good as a mile when placing any kind of financial transaction, and closely following economic data can place the odds in your favor.
So, what are the main indicators to watch?
- Gross Domestic Product, or GDP. This statistic indicates the health and growth of an economy. The data are announced quarterly with positive numbers showing an increase in economic activity. Three successive reports of falling GDP indicate that an economy has entered a recession.
- Employment is another closely-followed economic statistic that indicates the direction of a country’s economic growth. Positive numbers indicate an expansion in the economy. The statistic is normally quoted alongside a rate for unemployment, which is more relevant during a recession.
- Consumer Price Index, or CPI measures the price changes of a basket of consumer goods. The rate of increase in CPI is a direct indicator of inflation levels in an economy.
- Central Bank Minutes are closely watched as an indicator of future monetary policy.
- Purchasing Managers’ Index, or PMI indicates the rate of increase or decrease of goods stored by managers in their inventories. A positive PMI shows that managers are ordering more goods than a previous report and so it suggests a positive economic outlook.
The critical aspect of any economic statistic is its relation to previously-reported data of the same type. A GDP figure of +0.4% is only of interest when compared to the figure of the previous quarter. In addition, many services will collate a range of opinions from market leaders of their predictions of a forthcoming number. The relation to the new statistic must now be compared not only to a previous statistic, but also to the market’s expectation.
All economic indicators have their own related implications. For example, any sign of an economic slowdown is likely to affect interest rates of that country as well as the value of its currency. Other commodities are also affected, such as the price of gold, which can rise when rising inflation data is released.
Of course, it’s not always obvious which way the market will turn after the release of economic data. The market adage, “buy the rumor, sell the fact” suggests that even if market participants do call an economic indicator correctly, the market can just as easily sell off, even after a good figure.
Clearly, economic indicators should be an important event in any trader’s calendar, but be cautious and make sure you are employing sound money management techniques, just in case an anticipated rally turns into a surprising retreat.