Here are the major reports that have created dramatic and violent price swings in currencies. I want you to have a good understanding of what they mean so you can relate possible shocks to the markets when and if they are dramatically changed from what is expected before the reports’ release.
• Employment Cost Index (ECI). This is a measure of total employee compensation costs, including wages, salaries, and benefits. The ECI is the broadest measure of labor costs. The employment cost index helps analysts determine the trend of the direction of employers’ cost of having employees. This can give economists a clue whether inflation is perking up from a cost-of-doing-business standpoint. If a company needs to pay more to hire qualified workers, then the cost of doing business increases. This reduces profit margins. Companies usually raise their prices to consumers if their costs increase, and that is where the inflation theme plays out.
• Producer Price Index (PPI). This is a measure of the average prices paid by producers for a fixed basket of capital and consumer goods. The PPI measures price changes in the manufacturing sector. Inflation is a general increase in the prices of goods and services.
• Consumer Price Index (CPI). This is a measure of the average price level of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. The consumer price index is the most widely followed indicator of inflation in the United States. Just knowing what inflation is and how it influences the markets can put an investor ahead of the game. Inflation is a general increase in the price of goods and services. The relationship between inflation and interest rates is the key to understanding how data like the CPI influence the markets. Higher energy prices, manufacturing cost increases, medical costs, and imbalances in global supply and demand of raw materials and food products all weigh on this report. Take the price of gasoline we pay at the pumps. If gas prices escalate to the point where it costs $30 to fill up a car, or $60, or even $100, as was the case in 2006, consumers will have less spending money for other items. Even weather can be a factor on short-term changes on food. What would be the cost of tomatoes at the grocery store after a damaging freeze in California or in Georgia—$3 or $4 per pound? It has occurred. Think of the restaurants that serve salads and lose revenue, let alone the farmer whose crop is destroyed. This all plays a part in the CPI number. The core rate is the inflation number that excludes the volatile food and energy components.
• Gross Domestic Product (GDP). This is the broadest measure of aggregate economic activity and accounts for almost every sector of the economy. Analysts use this figure to track the economy’s performance because it usually indicates how strong or how weak the economy is, and that helps predict the potential profit margin for companies. It also helps analysts gauge whether the economy is accelerating or slowing down. The stock market likes to see healthy economic growth because that translates to higher corporate profits.
• Industrial Production and Capacity Utilization Rate. This is a measure of the physical output of the nation’s factories, mines, and utilities. The capacity utilization rate reflects the usage of available resources and provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 percent), it can lead to inflationary pressures. Industrial production shows how much factories, mines, and utilities are producing. Since the manufacturing sector is estimated to account for one-quarter of the economy, this report can sometimes have a big impact on the stock and financial markets’ movement.
• Index of Leading Indicators. This report is a composite index of 10 economic indicators that typically lead overall economic activity. The Index of Leading Indicators helps to predict the health of the economy, such as recessions and economic expansions.
• International Trade. This measures the difference between imports and exports of both goods and services. Changes in the level of imports and exports are an important tool that is used to gauge economic trends both here and overseas. This report can have a profound effect on the value of the dollar. That in turn can help or hurt multinational corporations whose profits overseas can diminish when they convert their funds back to the United States, especially if the U.S. dollar is overvalued. Another valuable aspect of this report is that imports can help indicate demand for foreign goods here in the United States and exports may show the demand for U.S. goods in overseas countries.
• Institute of Supply Management (ISM) Index (formerly the National Association of Purchasing Managers [NAPM] Survey). This survey is a composite diffusion index of national manufacturing conditions. Readings above 50 percent indicate an expanding factory sector. The ISM Index helps economists and analysts get a detailed look at the manufacturing sector of the economy. Since manufacturing is a major source of strength for the economy and can reflect the nation’s employment condition, this report is very important to watch.
• Factory Orders. This reports the dollar level of new orders for manufacturing durable and nondurable goods. The data from this report shows the potential that factories will be increasing or decreasing activity based on the amount of orders they receive. This report provides insight to the demand not only for hard goods, such as refrigerators and cars, but also for nondurable items, such as cigarettes and apparel.
• Productivity and Costs. Productivity measures the growth of labor efficiency in producing the economy’s goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends. Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences.
• Consumer Confidence. This is a survey or a poll of consumers’ opinions regarding both their present conditions and their expectations regarding their economic conditions. Five thousand consumers across the country are surveyed each month. The theory here is that the level of consumer confidence is directly related to the strength of consumer spending. Consumer spending accounts for two-thirds of the economy. If consumers are confident that times are good, spending is likely to remain stable or even to increase. If consumer confidence is weak, then more times than not consumers save and do not spend money. This shift in spending habits can help or hurt the developments in the economy from durable goods sales to home or car purchases. If consumers are not confident, then they are less likely to purchase those big-ticket items.
• Personal Income and Spending. Personal income is the estimated dollar amount of income received by Americans. Personal spending is the estimated dollar amount that consumers use for purchases of durable and nondurable goods and services. This economic number is important because if consumers are spending more than they make, eventually the spending will stop, thus causing a downturn in the economy. Another aspect to consider is consumers who save, maybe investing in the markets, and that can increase the value of stock prices. In addition, it can also add liquidity to the banking system if the money goes to savings or money market accounts.
• Durable Goods Orders. These reflect new orders placed with domestic manufacturers for immediate and future delivery of factory-made products. Orders for durable goods show how busy factories will be in the months to come as manufacturers work to fill those orders. The data provides insight into demand for things like washers, dryers, and cars and also takes the temperature of the strength of the economy going forward.
• Retail Sales. These measure the total sales at stores that sell durable and nondurable goods. This can reveal the spending habits of consumers, and the trend of those spending “sprees” can more often than not influence analysts’ expectations for future developments to the economy.
• Construction Spending. This report shows analysts the amount of new construction activity on residential and nonresidential building jobs. Prices of such commodities as lumber are sensitive to housing industry trends. In addition, business owners usually will put money into the construction of a new facility or factory if they feel confident that business is good enough to validate an expansion.
• Housing Starts. This is a measure of the number of residential units on which construction is about to start. The backbone of the U.S. economy is construction. Think about this: When you purchase a new home, you probably also purchase durable items, like refrigerators, washers and dryers, furniture, and lawn care products. This is known as a ripple effect throughout the economy. Think of all the jobs produced from construction to factory and transportation and even to communication and technology that goes into the building and financing and furnishing of a new home. The economic commerce is substantial, especially when there are a hundred thousand or more homes built in a month around the country. At the very least, the data from housing starts can help project the price direction for the sector of stocks in homebuilders, mortgage banks, and appliance companies. It used to be that lumber and copper futures prices were dramatically affected by the Housing Starts figure. However, since the development of prefabricated and new construction materials, especially fiber optics and plastics (PVC is used for plumbing rather than copper), lumber and copper are now less sensitive to the building industries’ trends.
• Mortgage Bankers Association Purchase Applications Index. This is a weekly index of purchase applications at mortgage lenders. This is a good leading indicator for single-family-home sales and housing construction. It provides a gauge of not only the demand for housing but also economic momentum. Each time the construction of a new home begins, it translates into more construction jobs and income, which will be pumped back into the economy.
• New Home Sales. This is the number of newly constructed homes with a committed sale during a month. The level of new home sales indicates housing market trends. This provides a gauge of not only the demand for housing but also economic momentum. People have to be feeling pretty comfortable and confident in their financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect throughout the economy and, therefore, across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio. Each time the construction of a new home begins, it translates to more construction jobs and income, which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Furniture and large and small appliances are just some of the items new home buyers might purchase. The economic ripple effect can be substantial, especially when a hundred thousand new households around the country are doing this every month. Since the economic backdrop is the most pervasive influence on financial markets, new home sales have a direct bearing on stocks, bonds, interest rates, and the economy in general. In a more specific sense, trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders, and home furnishings companies.
• Existing Home Sales. This is the number of previously constructed homes with a closed sale during the month. Sales of existing homes (also known as home resales) are a larger share of the market than new homes and indicate housing market trends. This provides a gauge of not only the demand for housing but also economic momentum. People have to be feeling pretty comfortable and confident of their own financial situation to buy a house. Analysts follow economic data such as home resales because this generates a tremendous economic ripple effect. Even for existing homes, buyers may purchase new refrigerators, washers, dryers, and furniture.
• Consumer Credit. This report measures consumer credit that is outstanding. Since one of U.S. consumers’ pasttimes is to “charge” goods and services to their credit cards, the overall changes in consumer credit can indicate the condition of individual consumer finances. On one hand, economic activity is stimulated when consumers borrow within their means to buy cars and other major purchases. On the other hand, if consumers pile up too much debt relative to their income levels, they may have to stop spending on new goods and services just to pay off old debts. That could put a big dent in future economic growth. The demand for credit can also have a direct effect on interest rates. If the demand to borrow money exceeds the supply of willing lenders, interest rates rise. If credit demand falls and many willing lenders are fighting for customers, they may offer lower interest rates to attract business.
• Business Inventories. Alan Greenspan watched this report; you should become familiar with it as well. This report shows the dollar amount of inventories held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator for the future direction of factory production.
• Consumer Confidence. There are several such surveys that gauge consumer attitudes; one is the Conference Board, and another is the University of Michigan. These reports reveal both the present situation and expectations regarding economic conditions. The level of consumer confidence is generally assumed to be directly related to the strength or weakness for consumer spending. Generally speaking, the more confident consumers are about their own personal finances, the more likely they are to spend. Think of how you act and feel as a “consumer.” If you have money in the bank and feel confident that your job is secure, buying an extra gadget or splurging on a night out usually won’t be trouble, right? But if times are tough, then the purse strings get pulled in, correct?
Get a calendar of events; check it every day to find out which reports will be released and at what time. Also be aware if there are scheduled speakers, such as heads of central banks, the president, or voting members of the FOMC. Make sure you converted these report release times for the time zone in which you live and trade. That way you will be prepared and not hit with an unexpected news-driven, price-shock event.