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Both tend to correlate fairly well with turns in the business cycle, but they are heavily influenced by the labour market. If unemployment remains high when other parts of economy are recovering, market sentiment may remain depressed, thus behaving as a lagging indicator in such circumstances.
The CPI measures the cost of goods and services, index-linked to a base starting point. This provides us with an objective handle on how fast prices are rising or falling. As we mentioned earlier in the article, price stability is part of the FED's dual mandate. When inflation is within target levels, it is considered normal or even desirable. However, if inflation veers too far off target for too long, it can have very negative effects on the economy. The CPI's usefulness as a leading indicator for the economy is limited. It has proven to be a poor predictor of turning points in the business cycle, despite a natural and logical association between economic growth, demand, and higher prices.
In the s and early s, high inflation was a real issue for the US economy. In contrast, in the aftermath of the global financial crisis, there was a real danger of deflation sustained price decreases. Deflation hurts the economy by incentivising consumers to hold off making purchases because they will be cheaper in the future, so long as prices continue to fall. As consumer spending constitutes such a large part of GDP, this will slow economic growth, and can create a vicious circle. Because inflation feeds into monetary policy so directly, the CPI report can have a high impact on prices in the bond , FX, and stock markets.
As usual, it is diversions from expected results that tend to have the highest impact. For example, if CPI comes in much higher than expected, it will alter the perceptions that the FED will be more likely to tighten monetary policy going forward. All things being equal, this should be bullish for the US Dollar. Similarly, a CFD trader might interpret such inflationary data as being bearish for the stock market, as tighter monetary policy tends to curtail risk appetite.
Since the financial crisis, we have been in a very low inflationary environment, which has forced the Federal Reserve to stick with very loose monetary policy. This has to some degree been responsible for the extended bull-market we have seen in the US. The Industrial Production Index measures the level of US output in terms of quantity of material produced rather than Dollar amount relative to a base year over three broad areas: manufacturing, mining, and gas and electric utilities.
The report is compiled by the Federal Reserve, and is published around the middle of each month. Some of the index data comes from hard data, reported directly for certain industries from trade organisations or official surveys, but this may not always be available on a monthly basis. To fill the gaps, the FED makes estimates using proxies, such as hours worked from the Employment Situation report, or THE amount of power used in the month by the industry in question.
The full process for calculating the index is set out in the best place to look for a full rundown of the methodology involved — the FED's own 'Explanatory Pages'. There are hundreds of components that make up the index, which is then reported as an index level. For example, the preliminary release of the industrial production index for September came in at This is an expression of the current output relative to the base year. At the time of writing, the FED used as its base period. The September level of The industrial sector is important because, along with the construction sector, it is responsible for the majority of the change in US output seen in the business cycle, and can offer insights into the evolution of structural economic changes.
The Industrial Production Index is procyclical.
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This means there is agreement between its movements and the changes in the business cycle. The correlation between this index and economic activity is close enough for some analysts to use this report as an early signal for how GDP might be performing. This indicator gauges how the US manufacturing sector is running as a proportion of full capacity. The definition of full capacity is the greatest level of sustainable output a factory can achieve within a realistic framework.
In other words, it takes into account things such as normal downtime. It is calculated as a ratio of the industrial production index divided by an index of full capacity. It may also provide clues about inflation. If factories are running hot, it's a reasonable assumption that producers may raise prices. If factories are running close to their maximum capacity, machines are likely to fail as a result of being overworked. Taking machines offline poses the risk of laying off workers at a time of high demand, which is undesirable. Accordingly, manufacturers are likely to cope with high demand by raising prices, rather than laying off workers.
This, in turn, is likely to feed through to consumer prices, leading to higher inflation.
#1: Unemployment Rate
Conversely, if capacity utilisation is running at low levels, it is a signifier of economic weakness. As such, this indicator is used by the FED to gauge trends in manufacturing, the wider economy, and also inflation. This makes it an important indicator for CFD traders to follow, particularly for bond traders, but it's also a key marker for those involved in the shares and FX markets.
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- #2: Gross Domestic Product (GDP) Growth Rate;
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It is, however, better known by Forex traders simply as retail sales. The Census Bureau, which is a division of the U. Department of Commerce, releases the report roughly two weeks after the month in question, at The report gives an early estimate of the nominal Dollar value of sales within the retail sector that is, the number is not adjusted for inflation and it also reports the number as a percentage change from the previous month.
Usually, it is this latter figure that CFD and Forex traders respond to. It is a closely-followed report and has the potential to send perturbations through market prices, especially if there is a big divergence between the reported figure, and Wall Street expectations. Why is it such a closely-followed report?
It's all about personal consumption expenditures PCE. PCE is a major contributor to the growth of US economy. The data covered in that report is more comprehensive than the retail sales report. Crucially, though, retail sales data comes out a good couple of weeks earlier, thus providing a more timely insight into effectively the same area of the economy. If retail sales are increasing, it is an indication of economic health, and it tends to have a bullish effect on the stock market.
Strong sales data may lead to rising prices, however, meaning that there are inflationary considerations to be taken into account. This tends to have a positive effect on the US Dollar, but is bearish for bond prices. Conversely, weakness in the retail sales report tends to depress the stock market, is bearish on the US Dollar, but bullish for bond prices. Certain components of the report may contribute to unwanted volatility from an analysis perspective. Motor vehicles, because of the expense of such items, tend not to be evenly distributed month to month.
Accordingly, analysts often focus on retail sales, excluding auto sales in order to remove unpredictable variations, and to perceive underlying trends in the data more easily. Department of Commerce. The Advance Report on Durable Goods, to give it its full name, is released around 18 business days into the month, after the month for which it is reporting the precise day varies according to the schedule of other key releases at the time. Durable goods are defined as items that are expected to last for at least three years.
In other words, we are generally talking about expensive items that tend to be bought infrequently. This infrequency means that the report is subject to volatility and you need to be very careful about what you read into a single report in isolation. Analysts often exclude the transport component of the report, to try and mitigate this volatility. Another method employed is to consider a series of reports together in order to try and gauge some kind of feeling for an underlying trend. Also, beware of revisions to a previous month's data, which can be substantial.
If demand is strong and companies have an upbeat outlook, we would expect to see increases in new orders for durable goods. On the other hand, in a weak economic climate, we would expect to see lower orders. Therefore, strength in this report is bullish for risk appetite, and weakness is bearish. As far as CFD traders go, strength in durable goods is a positive sign for stocks, all other things being equal. In terms of the effect on the Forex market, it is a similar story for the US Dollar as it is for stocks: a strong report is bullish for USD, as a burgeoning economy would tend to lean towards a tighter bias in monetary policy from the FED.
This 'Weekly Report' measures the number of people making first-time claims for unemployment benefit insurance. This provides a useful update on the strength of the labour market, particularly when it coincides with the sample week used for the 'Employment Situation' report. Short-term changes in the labour market are much more likely to be reflected in the weekly initial jobless claims data, than in the monthly employment report.
Knowing about which economic indicators impact the Forex market is one thing, but keeping on top of the releases is another. To properly keep yourself up-to-date, you need to plan ahead and have a good quality news feed. To help plan your schedule, try taking a look at Admiral Markets' Forex Calendar.
MTSE is a custom plugin, which offers a wide selection of trading tools, including a real-time news feed via 'Admiral Connect'. Try out trading on the back of economic releases, and see how you do with a demo trading account. You'll be using real market prices, but you won't be risking real money, so you can practise until you are proficient, and confident enough to face the live markets!
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We hope that these detailed definitions of economic indicators have helped you. Of course, the list is far from comprehensive, but you should find that those included here are among the more impactful economic indicators for Forex trading. Bear in mind, that when we have described the possible impact of economic results, it is with the caveat of 'ceteris paribus'. Which is to say, the actual results may be more nuanced than simply one variable being at play.
A strong payrolls result would normally be considered a bullish result for the US Dollar, but Forex traders also need to look at how inflation expectations may be influencing monetary policy, the path other central banks are following, and what has already been priced into the Forex market.