Economic data releases

Economic data releases are information sets that describe activities in an economy. Typically they are in a time series format that covers, weeks, months, quarters or yearly statistics. Each economic data release will have its own format for how often it is released and at what times but they typically are pre-scheduled and released at the same time each release.

Economic data releases are something that is very important when it comes to moving the Forex market. These are regularly published by government agencies and central banks around the world. Every day, stocks, bonds and currencies fluctuate in response to and the expectations of new economic information and the data produced by economic data releases. So, needless to say, they are a big deal!

Economic Data Primer

Professional traders and money managers spend a lot of their time researching economic data statistics because they provide crucial clues about financial markets and the potential future health of economies. They do this because fundamentals and economic indicators are what move the Forex market a good majority of the time.

In this article, we will refer to economic indicators, data sets, figures, releases, and economic news sets interchangeably throughout this lesson. They all describe the same thing. Different analysts will prefer to use one term over another to describe the same thing which is why we will use them interchangeably. We will look at some of the major economic figures that can and do have an impact on the prices of currency pairs in the Forex market because paying attention to these figures is very important as they will have an impact on your trading.

Some of this information might not be the most exciting right now but it’s all something that you will undoubtedly come across on a daily basis when you are trading in the Forex market. As with all things you will gain a much greater understanding of how these economic releases impact the markets by experiencing them in real-time.

The Importance of Globalization

It was once the case when traders would primarily concern themselves with United States based statistics because, at the time of this writing, the United States is the world’s largest economy and single superpower. However, with today’s globalization of financial markets and the reduction of trade barriers between most countries, this is no longer the absolute case. Globalization is a real thing and here to stay (for now) so traders need to make sure they are paying attention to economic data sets from the other key countries that belong to the currencies they are trading as well. This is particularly true for key currencies such as the Great British Pound, Euro, Japanese Yen, Swiss Franc and the Canadian, New Zealand, and Australian Dollars.

Of course, if a trader is interested in trading emerging currencies such as the Mexican Peso or some of the Scandinavian currencies then they will need to concern themselves with the indicators from those countries as well. The good news is that more and more people are jumping into those currencies so more information is becoming broadly available now.

How to know when Economic Data is Released

Almost all economic data and statistics are published at pre-set times during the month. This means that traders will know well ahead of time what data is coming out as long as they use an economic calendar ahead of time.

One of the best and most simple to use free economic calendars that is one of the most highly used by retail traders is from Forex Factory.

ForexFactory.com/Calendar

For the most part, traders will want to concern themselves with the data sets that have the impact coloured red. This is not always the case though; sometimes orange impact events will move the markets quite a lot and sometimes there will be red impact events that are not all that important.

For example, at the time of this writing, Forex Factory puts the weekly jobless claims out of the U.S. as a red impact event. However, we have found that this rarely moves the U.S. dollar because it is a “weekly” release and therefore this tends to be a very consistent number and well-known expectation. However, if the market is currently very focused on jobs data of if a central bank is overly concerned with jobs then it very well could deserve to be a red impact colour.

On the flip side, at the time of this writing, Forex Factory colours U.S. Core PCE as an orange impact but this happens to currently be the Fed’s main measure of inflation so it’s actually really important and can have quite an impact on the U.S. Dollar at times.

The main thing is that traders need to be in tune with the market and what the major theme is to understand the impact of any event at any given time. A yellow impact event could be the most important thing that will move prices if that is what the market is obsessing over at that particular moment.

What Traders Need to Know about Economic Data

As a trader there are a few important things they need to know about economic data:

• What data is coming out and when.
• What the market expectations are for that data.
• What the potential impact the release could have on the currencies that will be affected.

If a trader knows the above then they can start to form a bias for their trading.

The Expectations of Data is Critically Important

When talking about fundamental economic releases; what the market EXPECTS is, at the very least, as important, if not more important, than the actual headline number when it is released.

This expectation is very often one of the deciding factors as to which economic statistics are being viewed as significant at any given point in time. For example, if the market is paying close attention to a particular economic indicator then you know that it is likely to be important because traders only want to focus on what the vast majority of market participants are focused on. Traders also want to know why they are focussing on certain information.

The simple thing with all of this is that the market is going to be paying the most attention to what the central banks are saying that they are paying the most attention to. You can really make it that simple most of the time. Generally, if a central bank publicly states that they are heavily monitoring jobs data because they are very concerned with poor readings for example, then the rest of the professional market is going to focus with laser beam precision on jobs data! In this situation, traders probably don't care much about what housing data says because the central bank is not concerned either.

In this example, the market expectation around jobs data is going to create a lot of price movement before the jobs data is actually released. This is sometimes referred to as “trading into a risk event” using the market expectation and can be very valuable to a traders trading. What happens after the jobs data is released will largely be a product of unwinding the expectations based on the actual numbers that were released.

Economic Data and Economic Cycles

It’s important to view economic data developments in the context of trends and cycles. What does this mean?

The Trend

The trend is the long-term rate of economic expansion within an economy. So, if we have a situation where a particular data set has been coming out really positive 9 months in a row then we can confidently say that one bad number does not change the overall positive trend. 9 positive readings out of 10 makes for a very positive trend and the one bad reading could be dismissed as long as more poor readings don't keep happening.

Industrialized economies tend to have growth trends that can last decades so traders don’t need to change their entire opinion of the fundamental situation of an economy just because one bad number came out the previous month.

The Cycle

The cycle represents short-term fluctuations around the trend and that too can provide some nice trading opportunities.

The Economic Cycle

Since we have made mention of the economic cycle it is perhaps a good point to give you a simplified explanation of what it actually is so that you can better understand how it functions in relation to economic data.

There are 4 stages of cyclical activity in the business cycle:

1. Expansion: This is a time when demand first increases and then starts to gather momentum. This demand creates jobs and new employment which then creates more demand for consumer goods and housing. This is because more people have good paying jobs and more disposable income. This is the time when people are most secure with their job and spending their money. Policymakers love this part of the business cycle.
2. Peak: The earlier momentum from the expansion phase cannot continue forever and at some point, it has to top out. Interest rates typically rise near the peak because of the prolonged good economic conditions from the previous expansion. Interest rates go up because inflation is at or has breached the central bank's mandate and they need to slow it down. These higher interest rates are at times arguably what causes the next part of the cycle.
3. Recession: Demand starts falling which causes producers of consumer goods to start cutting back on labour in an effort to remain profitable. This cutting back of the labour force starts to show up negatively in the unemployment statistics. Unemployment starts to rise and this, in turn, reduces consumer demand because fewer people have jobs, and as a consequence have less disposable income. Policymakers want this phase to be as short as possible so that the economy can get back to growing again.
4. Trough: At some point just as the economic situation looks the worst the total economic output will find a bottom and stop falling. The central bank will typically start cutting interest rates with the hope that businesses will borrow money and invest in new projects. The idea is that this will create new jobs and stimulate demand for consumer goods as well. The point is to get out of the trough and back into the expansion phase quickly.

GDP Data

Gross Domestic Product, or GDP for short, is the total of all economic activity in one country regardless of who owns the productive assets (the things that generate the money). For example, if a Japanese-owned company is making cars inside of the United States then this economic activity will count in the U.S. GDP calculation.

Because GDP is the main measure of total economic activity this makes it very important. It’s the monetary value of all the finished goods and services produced within a country's borders during the specific time period being measured. It includes all private and public consumption, government outlays, investments, and exports minus imports that occur within a country. Put simply, GDP is a broad measurement of a nation’s overall economic activity and health.

GDP is most commonly used as an indicator of the economic health of a country. It’s also used as a gauge of a country's standard of living for its citizens. Since the way of measuring GDP is fairly similar from country to country, GDP can be used to compare the productivity of various countries with a fairly high degree of accuracy.

A nation’s GDP from any time period can be measured as a percentage relative to previous years or quarters. When traders measure GDP in this way, it can be tracked over long periods of time and used in measuring a nation’s economic growth (or lack of growth). It can also help in determining if an economy is in a recession or if it is growing in a way that increases the standard of living for the nation’s people.

Real GDP

Real gross domestic product is an “inflation-adjusted” measure that reflects the value of all goods and services produced by an economy in a given year. This is expressed in base-year prices, and is often referred to as "constant-price," "inflation-corrected GDP” or "constant dollar GDP."

Unlike nominal GDP, real GDP can account for changes in price levels and provide a more accurate figure of economic growth. This represents the total economic activity in constant prices.

It’s significant because it’s useful for tracking how an economy is developing over time. Real GDP reveals changes in economic output after adjusting for inflation. So, if regular GDP was 4% but inflation was 2% for the same time period, then real GDP is actually 2% (4% - 2% = 2%).

This is typically viewed in the context of the overall economic cycle and becomes more significant at certain points within the economic cycle.

Nominal GDP

Nominal GDP is gross domestic product, or total economic activity, measured at current market prices.

Nominal GDP differs from real GDP in that it includes changes in prices due to inflation. Basically, Nominal GDP tells us the overall increase or decrease in price levels. It’s significant because it describes the total level of production or economic achievement within a nation.

Per Capita GDP (GDP per Head)

Per capita GDP measures the output on a per-person basis. The equation is GDP divided by the population size of the nation being measured.

It’s significant because it’s used as an indicator of overall economic welfare. Output per head can be used as a good guide to understanding the living standards of the nation’s people. If real GDP per head increases it indicates an improvement in the overall economic well-being because people have more money and can therefore increase their standard of living.

Per capita GDP is especially useful when comparing one country to another because it shows the relative performance of each country being measured. A rise in per capita GDP signals growth in the economy and tends to reflect an increase in productivity and economic welfare.

Productivity GDP

This measures the output for one unit of labour or capital. It’s significant because it indicates the “efficiency” and the “potential” of total economic output.

Productivity is highly cyclical since employment and capital are less flexible and change at a slower rate than supply and demand. If you think about it, demand for certain products can dry up virtually overnight but the manufacturing and employees making the products don’t catch wind of this event until much later because there is a time lag.

GDP Deflators

“Deflators” measure the difference between the current and constant price GDP and its individual components. For example, if GDP increases by 4% in nominal terms but increases by 1% in real terms then the implied economy-wide rate of inflation is 3% (4% - 1% = 3%). This is an attempt to smooth out inflation readings.

Deflators are valuable for identifying trends and obtaining advanced warning of price changes which is what makes them valuable to monitor for economists