In view of the heightened event risk it is crucial that spread traders look ahead at how the scheduled announcements could affect their positions. Information on what's coming up is readily available in the forward diaries that spread betting providers put together for their clients. Some of the most important indicators at the moment are the housing data and indicators of consumer sentiment as both can have a marked impact on share prices.
This section provides a general guide to leading indicators (data with predictive value).
Click below for lists and explanations of some of the more significant leading indicators from the US, UK and Japan.
This report, from the Bureau of Census, measures sales of goods to consumers at retail outlets. The data is gathered via a survey of a random sample of retailers and is calculated as the total receipts of retail sales in nominal dollars excluding returns, taxes and finance charges.
The report is released at 08.30 EST around the 12th of each month and is reported as a percentage change from the previous month.
Consumer spending constitutes two thirds of GDP and is consequently a major component in economic growth. Retail Sales accounts for one third of consumer spending, meanwhile, and hence can be considered a reasonable measure of consumer demand in advance of the release of GDP data.
The data in this report therefore has the potential to substantially move the financial markets, particularly stocks in the retail sector. Furthermore, the data is released swiftly, following the month to which it pertains by no more than two weeks.
Generally, a strong (positive) figure would prove beneficial for the financial markets, as it indicates solid economic growth. Ideally, the economy walks a finely balanced line between solid growth and excessive growth. Retail Sales that are too strong, therefore, can create inflationary worries.
The figures can also help to paint a picture about different types of businesses within the retail sector and such trends can be used to identify specific trading opportunities ahead of company's reports.
Retail sales figures are subject to major revisions every month, however; it is not unusual for a positive figure to be reported one month only to be subsequently revised to a negative figure the next month. The report is also subject to seasonal variations, and this seasonality can cause volatility in the numbers reported, which can make trends difficult to spot. Further difficulties arise from the report not being adjusted for inflation: a positive figure may be the result of inflated prices rather than being indicative of increased consumer demand.
The retail sales figure is also reported excluding automobile sales. As a result of their high cost, auto sales make a substantial contribution to retail sales, accounting for close to 25% of the figure. Consequently, variations in automobile sales can produce high fluctuations in the report. Auto sales are also subject to seasonal changes, thus easily distorting trends. A more accurate picture of retail sales can be achieved, therefore, by removing the auto component.
This report is actually entitled 'Summary of Commentary on Current Economic Conditions by Federal Reserve District', but is more commonly known as the Beige Book, and is released two Wednesdays before every FOMC meeting at 14.15 EST.
The report is made up of anecdotal information collected by each of the Federal Reserve Banks on economic conditions within the 12 Federal Reserve districts. Each bank assembles the facts for its district via Bank and branch directors and interviews with key business contacts, economists and market experts. An overall summary of the 12 district reports is organised by a selected Federal Reserve Bank on a rotating basis.
The Beige Book is published in advance of the FOMC meeting to set interest rates and is used to update members of the committee with the latest economic changes.
The report is useful as it allows investors to see what information the FOMC members will be basing their decision upon. The findings contained within the report are also likely to be germane owing to how recently the data has been procured: information is unlikely to be more than two weeks old. The Beige Book does not offer insight into the FOMC members' thoughts on the economy, however; it simply states facts regarding the economy in various regions of the US. Moreover, the information in the report is not quantative: it is anecdotal and descriptive only.
The Beige Book is not, in itself, considered to be a big market mover, although occasionally it has been known to sway the markets if the figures are a large departure from analysts' expectations.
This figure is released on the last Tuesday of every month at 10.00 Eastern Standard Time (3pm London) by The Conference Board. The Consumer Confidence Index is compiled via a survey of 5000 US households that investigates the outlook of consumers toward current economic circumstances and their views of the future prospects of the economy.
The data is split into different areas around the US and can give strong indications of consumer spending. Although the two are not definitely tied together, and don't necessarily move in tandem, high or growing consumer confidence is likely to lead to high or growing consumer spending. With consumer spending contributing well over half of the US economy, any clues as to the changing nature of that spending is therefore a useful indicator as to how the economy may perform.
The Fed also intently follows consumer confidence and it bears an influence on their decision making process when determining interest rates - for example, high or rapidly rising consumer confidence has inflationary implications. Conversely, the Fed may feel obliged to cut interest rates to bolster low consumer confidence and generate greater spending. The survey can also offer evidence about the labour market - expectations of rising wages may indicate a tightening job market.
An index change of at least five points is considered to be noteworthy; many people use a three- to six-month moving average in order to spot changes in trend, with the accepted wisdom being that important changes in consumer confidence occur when the index moves above or below the moving average.
The Consumer Price Index (CPI) measures the average price of a fixed basket of goods and services as might be purchased by consumers and provides a guide to the rate of inflation - the CPI is, in fact, the most extensively monitored inflation indicator in the US. The figure is released by the Bureau of Labour and Statistics around the 15th of each month at 08.30 EST.
Inflation bears a potent influence on how interest rates are set, which accordingly has a knock-on effect on shares, bonds and commodity prices.
A rising CPI indicates inflation and a large increase in the CPI indicates a large inflation rate. Low rates of inflation are likely to be tolerated by the Federal Reserve, but the Fed tries to combat inflation by increasing interest rates.
A large increase in the CPI, therefore, suggests the likelihood of increased interest rates, and in the long run, should lead to the bond markets falling; such an inflationary figure is also likely to have a deleterious effect on the stock market.
Correspondingly, small increases in the CPI should mean a rally of the stock market, along with bonds. Typically, the CPI rising at an annual rate of 1-2% is seen as optimal; anything over this is a forewarning of mounting inflation.
This is a government index released monthly by the Census Bureau of the Department of Commerce at 08.30 EST, usually around the 26th of the month. The data relates to activity for the previous month.
The index measures the quantity of new orders placed with US manufacturers for delivery of durable factory goods, such as machinery, vehicles and electrical appliances. Durable goods are defined as being items that have a normal life expectancy of three years or more.
A rising level of the index indicates an increasing demand for US manufactured durable goods, which implies a likely increase in production and employment. A falling index suggests the converse.
This figure is important, as it gives an insight into a significant component of the economy: namely, the manufacturing sector.
The data also provides hints about business investment: if there is a greater demand for expensive pieces of equipment such as industrial machinery and computers, for example, it indicates a commitment to spending from businesses, which in turn intimates that they must be encountering sustainable growth.
A strong figure should be positive for the US dollar as well as for the stock markets.
A relatively new survey as compared with more established US business surveys (such as the Philly Fed and the ISM Manufacturing Index), this survey was first conducted in July 2001, with the first release of information occurring a year later.
The Empire State Survey is based on the same methodology and asks the same questions as the Philadelphia Fed's Business Outlook Survey and is conducted monthly by the Federal Reserve Bank of New York (the New York Fed).
The participants are New York State manufacturing companies with 100 or more employees or annual sales of at least $5 million (about 250 companies).
The results of the survey are published on the fifteenth of the month (or on the next business day) .
The questionnaire invites the contributors to document the direction of change of a number of business indicators, such as general business activity, new orders, inventories and shipments. The options are purely directional, i.e. increase, decrease or no change, with no indication of magnitude being requested.
For each indicator, the New York Fed subtracts the percentage of participants disclosing a decrease from those noting an increase.
Manufacturing conditions are subject to seasonal variations, and as a consequence, the data are adjusted to take into account these variations. As the Empire State Survey has a relatively limited amount of history, the New York Fed uses data from the same questions in the Philly Fed's Business Outlook Survey, married with Empire State Survey data, in order to calculate the seasonal adjustments factors.
The Empire State Manufacturing Survey is a comprehensive snapshot of the NY State manufacturing sector, providing evidence of how busy the sector currently is and where the sector is likely to be heading.
Manufacturing is an important component of the US economy and this survey can therefore exert a strong effect on the stock and bond markets.
This survey is posted before the other major manufacturing surveys (the Philly Fed's business outlook survey, the NAPM-Chicago Index and the ISM manufacturing index) and therefore gains its influence on the equity markets from its status as being the 'early bird'. Its impact on the bond market comes as a consequence of the Federal Reserve viewing this survey as an important inflationary indicator.
The Employment Cost Index (ECI) is the broadest indicator of labour costs and is released quarterly, at 08.30 EST on the last Thursday of April, July, November and January.
The data contained in the report covers the previous quarter and is based on a survey of employer payrolls. Among the labour costs that are measured are employee wages, benefits, bonuses and compensation costs, with wages and salaries comprising roughly 75% of the value of the index. The ECI does not cover employee stock options, as these do not cost employers anything to issue.
Over 3000 private sector firms and over 500 public sector organisations are surveyed by the Bureau of Labor and Statistics in producing the index.
The ECI is a good method for assessing how wages and wage inflation are developing. As wages increase - and the ECI rises - so should inflation. This is essentially because compensation has an inclination to rise before companies raise prices for consumers (in other words, inflation). For this reason, wage inflation holds a high-ranking position on the Federal Reserve's watch list. The release of the ECI therefore has the potential to readily move the financial markets.
Another useful application of the ECI is to weigh it up against productivity growth and inflation rates, with the model result being all three increasing in unison. Rising wage costs balanced against productivity that is standing still clearly indicates difficulties for companies. Furthermore, this is likely to be against the backdrop of rising interest rates, as the Fed seeks to head off inflation.
Limitations in the effectiveness of the ECI come as a result of its quarterly nature - the data may not be so relevant by the time it is released. Furthermore, the ECI does not take account of federal government wages, which consist of 2-3% of the entire American labour force.
The Employment Situation is a monthly report on the labour market in the US. The data is released at 08.30 EST on the first Friday of the month and relates employment information for the previous month. The report is issued by the Bureau of Labor and Statistics and consists of two core parts.
The first part is concerned with measures of employment. Figures contained in this section include:
The second part of the report contains information about the labour market such as average weekly hours worked (in the non-farm sector) and average hourly earnings.
The Employment Situation Report is considered to be the best indicator of unemployment, wage pressure and the overall job market. Such information can be extremely useful for judging the present and future direction of the economy and this makes the report a hugely important indicator, often causing dramatic market movements. Consequently, the Employment Situation is closely watched by investors.
The report is comprehensive, covering over 250 regions across the US and almost every important industry. The data is also very up-to-date: the information contained in the report is only a few days old.
The employment data contained in the report presents an insight into wage trends and therefore wage inflation, always something for which the Fed is on the lookout, and the information can therefore act as a pointer toward interest rate changes.
This indicator can also occasionally set the tone for other indicators that occur later in the month. The data is specified by industry so that, for example, information pertaining to construction jobs may have a bearing on Housing Starts.
Investors should be wary of the fact that summer or seasonal employment does tend to skew the results of this indicator.
In the US, the Federal Reserve has responsibility for setting monetary policy.
The Federal Reserve Open Committee (FOMC) holds eight regularly scheduled meetings each year. These occur approximately every six weeks and are immediately followed by an announcement of any changes to monetary policy.
These meetings are considered to be the single most influential event for the financial markets.
The FOMC consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; four of the remaining eleven Reserve Bank Presidents, who serve one-year terms on a rotating basis.
The dates scheduled for meetings during 2008 are January 9, January 21, January 29/30, March 10 and March 18, April 29/30, June 24/25, August 05, September 16, October 28/29 and December 16.
The dates scheduled for meetings during 2009 are January 27/28, March 17, April 28/29, June 23/24, August 11, September 22, November 3 and 4 and December 15.
Changes to monetary policy most often relate to changes in the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
The federal funds rate acts as a yardstick for all US rates and adjustments by the Fed to the rate produce a chain of events that influence other short-term interest rates, FX rates, long-term interest rates and eventually a host of economic factors, such as employment, output and prices of goods and services.
Changes in the federal funds rate, and the associated knock-on effect to other rates and to bonds, can have a strong effect on investment trends: a rise in rates, for example, which leads to higher yielding bonds and better returns for other fixed-income products, can make stocks less attractive.
Moreover, higher rates will slow consumers' high-level purchases (most significantly houses and cars) and will have a major bearing on companies that have high levels of debt or businesses that have to pay financing on high inventory levels.
Ultimately, lower interest rates are bullish for the economy and financial markets, whereas higher interest rates are bearish.
Gross Domestic Product (GDP) is the broadest overall benchmark of economic activity and quantifies the production of goods and services within the US.
It is calculated by adding up all expenditures on all final goods and services produced during the year as shown:
GDP = C + I + G + (X - M).
Where:An increasing GDP indicates an improving economy, which is generally good for the dollar and for the financial markets. Extremely robust economic expansion can create inflationary concerns which may contribute to tightening of monetary policy.
Most of the components that comprise the report are known well in advance, meaning that GDP tends to be well anticipated. If, however, the figure does differ from expectations, it does have the potential to cause significant market movement.
Housing Starts is a report that measures the change in volume of new houses built in the US each month. The report is released two to three weeks after the month in question at 08.30 EST by the US Census Bureau.
The data is broken down into different categories of housing: single-family residential units, two- to four-family residential units and five- or more-family residential units.
The single-family Housing Starts figure is a more dependable indicator than the multi-family figure, as single-family housing is driven by demand and consumer confidence, whereas multi-family residences can be subject to the influence of property speculation.
An increase in Housing Starts implies an increase in commitment to build new properties by developers and construction companies. As such a commitment will inevitably involve large outlays, it can be seen to indicate an increase in investment and business optimism.
The report also sheds light on consumer activity: buying a new home is always likely to involve high consumer spending in the form of decorating costs, household appliances, etc.
As a consequence of its relationship with consumer and corporate sentiment, property investment typically guides economic development.
A fall in Housing Starts is often a forewarning of a slowdown in the economy, whereas a rebounding number of Housing Starts can often point toward economy recovery.
The Housing Starts report is one of the earliest indicators for the housing market: only Building Permits is more timely.
Industrial Production is a monthly report that measures the volume of output of factories, mines and utilities in the US. The data is released by the Federal Reserve Board at 09.15 EST, roughly 15 days after the month in question. The figure is subject to modest revisions three months after release, with annual revisions in early autumn.
As Industrial Production quantifies output volume as opposed to dollar value, the data is not distorted by inflation and is therefore deemed to be a 'purer' gauge of the industrial sector in the US.
Industrial Production makes up no more than 20% of the US economy, yet is responsible for most of the volatility and is judged to be very susceptible to variations in interest rates and consumer demand. Consequently, spotting trends in this figure can offer clues as to the futures trends of GDP.
High or rising Industrial Production suggests economic expansion, which should be beneficial for the stock market. If the figure rises too quickly, suggesting aggressive or uncontrolled growth in the economy, it can cause inflationary pressures, which is bad for the bond market.
This indicator can change quite dramatically from month to month simply due to seasonal and weather conditions, which can strongly impact on factory production. The report's effect on the market is limited as a consequence of this inherent volatility.
The ISM Manufacturing Index is a monthly survey conducted by the Institute of Supply Management that gauges the condition of US manufacturing activity.
The report is released at 10.00 EST on the first business day following the month under survey, and is considered to be the most important of all manufacturing indices.
The indicator is based on a survey of over 300 purchasing managers across the US, representing 20 industries, and covers such topics as New Orders, Production, Employment, Inventories, Delivery Times, Prices Paid, Export and Import Orders.
For each topic, those surveyed are asked to indicate observed activity with a response of 'higher', 'no change' or 'lower'. A diffusion index is hence created by adding the percentage indicating 'higher' to half the percentage denoting 'no change' and subtracting the percentage of 'lower'. The headline figure for the overall ISM Manufacturing Index is then calculated as an aggregate of the result for all categories.
Readings greater than 50% are generally accepted as pointing toward expansion in the sector, while readings below 50 usually correlate with contraction.
Values below 40 are usually recognised as a sign of a recession in the overall economy. Values above 65 indicate strong growth.
The ISM Manufacturing Index is liable to move markets, especially when periods of rapid economic growth are approaching the end of their cycle. Its reputation as one of the chief market-moving economic releases is related to how quickly the data is released: the information contained in the report presages other key data, such as Non-farm Payrolls and CPI.
Moreover, variations in manufacturing tend to wield the greatest influence on changes in GDP, despite manufacturing constituting only a comparatively small proportion of GDP. Trends in the direction of the economy are accordingly often foreshadowed by developments in manufacturing: an upturn in manufacturing activity after a period of recession is a strong indication of a reversal upward in the economy. On the other hand, waning levels of manufacturing orders and production in a phase of expansion may well suggest a slowing economy - or even herald the beginning of a recession.
The index is also seasonally adjusted in order to take into account variations during the year.
Additionally, the report contains a price index: the ISM Prices Paid figure. It represents business sentiment regarding future inflation, where a higher figure indicates stronger expectations of inflation.
This is a simple measure of the job market in the US. The figure reports the numbers of individuals who are signing on for unemployment insurance for the first time. Therefore, a rising movement in the number indicates a weakening labour market and a downward movement in the figure indicates a stronger job market.
Generally speaking, a strong labour market should have a positive influence on the economy, as it implies increased household spending power (generated by the income that comes from the increased number of jobs).
A very strong labour market can be a cause of inflationary pressures, however, as a tight labour market - where employers face competition for new workers as a result of the relatively low number of people looking for work - can lead to increased labour costs. Such wage inflation increases the likelihood that interest rates will be raised by the Federal Reserve. This will, in turn, have an impact on bond and stock prices.
This figure measures numbers of recently built residential housing with a committed sale for the month.
This ostensibly narrow set of data has a ripple effect throughout the economy: as well as providing a direct guide to housing market trends and to how well companies in the building sector are likely to be doing, the construction of a new home generates more building jobs (the creation of jobs always implies an increase in household spending power and therefore is generally considered beneficial for the economy), revenues for the construction company and estate agent.
One would also expect the new home buyer to be making a number of consumer purchases of furniture and household appliances (in other words, each new home sale leads to an associated increase in household spending).
To conclude, the new home sales figure directly influences stock, bond and commodity prices, by virtue of the wide-ranging boost to the economy that new homes generate.
The Philly Fed (or the Federal Reserve Bank of Philadelphia's Business Outlook Survey, to give it its full name) is an index that is compiled monthly based on a survey of manufacturing conditions in the states of Philadelphia, New Jersey and Delaware. The data is released by the Federal Reserve Bank of Philadelphia around the 17th of each month at 10.00am EST and is widely seen to indicate the direction that the manufacturing sector is heading.
The survey has been carried out since 1968 and is composed of a number of questions regarding business activity, such as employment, working hours, orders, inventories and prices, that are posed to manufacturing companies in the relevant states.
The index indicates contraction when it is below zero and expansion when it is above.
Although not considered to be a particularly big market mover, the Philly Fed Index is useful for a number of reasons. The results are released early in comparison to other similar indicators, and therefore can be used as a guide as to what to anticipate. Manufacturing is widely accepted as being a forerunner of upcoming conditions in the economy - in poor market conditions, for example, an upturn in the manufacturing sector will usually lead to an anticipation of economic recovery.
Limitations in the survey are as result of it only covering three states. Consequently, the performance of the index does not automatically translate to a similar performance across the rest of the US.
The Producer Price Index (PPI), formerly known as the Wholesale Price Index, is a measure of inflation. While not as widely used as the CPI, many market participants do still pay close attention to the PPI and it is regarded as a high-quality gauge when it comes to detecting inflation.
The PPI is a basket of prices affecting US producers, made up of roughly 100,000 prices collected from 30,000 production and manufacturing firms.
The PPI consists of three core areas: finished goods; intermediate supplies (in other words, materials and components);and raw materials that require initial processing. The most oft quoted of these three is the 'finished goods' PPI, which reports on products that are bought by companies from producers in order to be sold on to consumers. This is because commodity prices, especially food and energy, react quickly to supply and demand, which is a source of volatility in the PPI; the 'finished goods' PPI excludes food and energy. This makes this form of PPI more comparable with CPI, which has a measure of stability by virtue of wages making up a greater share of costs at the retail level than at the producer level (wages being less volatile than goods).
While the CPI measures prices that consumers are paying, and affects the Fed's interest rate policy more directly, the PPI presents key data from earlier in the production process - it therefore potentially offers an opportunity to predict movement in the CPI.
If the prices paid to manufacturers are going up, businesses will be left with the choice of either charging higher prices or taking a drop in profits. The ability of businesses to pass on costs in the form of price increases is dependent on the strength of the marketplace and how competitive it is.
A decreasing or marginally increasing PPI suggests low inflation - and low interest rates - which should, in theory, mean a rallying bond and equity markets. Any PPI figure that is larger than expected has inflationary implications and is likely to adversely affect the bond and equity markets.
A drawback to PPI data is that the index does not take into account the prices of imported goods. Consequently, it is unlikely to accurately measure producer prices for businesses with international operations.
The Purchasing Managers' Index (PMI) is a report mainly composed of five indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The index is released by the Institute of Supply Management (ISM) at 10.00am on the first business day of each month, and contains data for the previous month. The data is compiled by the Association of Purchasing Managers who survey over 300 purchasing managers across the US who act for 20 different industries.
An index level over 50 suggests an expanding manufacturing sector, whereas a figure below 50 indicates that manufacturing is tightening.
The PMI is seen as the most representative indicator of factory production and, as such is very influential on the stock market; it is regarded as a useful tool for identifying inflationary pressure and also for gauging the economic performance of the manufacturing industry. CPI data is considered more useful as a measure of inflationary concerns, but the PMI is useful in this area owing to its timing: the data is released just one day after the month to which it pertains.
Any unexpected result in the PMI generally results in a swift response in stock prices. Of the five major components of the index, new orders is perhaps the most important, as it is can be used to estimate manufacturing activity over coming months.
The PMI is frequently employed as a predictor of the Produce Price Index which is released later in the month.
The University of Michigan's Index of Consumer Sentiment (often known simply as Michigan Sentiment) is a monthly report that assesses consumers' thoughts on the economy and their personal finances.
Preliminary numbers are released on the second Friday of each month and revised final figures on the last Friday of the month at 09.45 EST.
The report is determined via a survey of consumers from 500 households. The preliminary figure encompasses roughly 60% of the data used in the final figure, and is not officially meant to be released to a wide audience. Preliminary figures are regularly leaked to the press, however, and therefore accessible to the financial industry.
Although the survey polls fewer consumers than the Conference Board's Consumer Confidence Index, and is not as well established, the University of Michigan Survey is acknowledged as being one of the primary indicators of US consumer sentiment and often moves the financial markets on release.
The headline figure is determined by subtracting the percentage of unfavourable responses from the percentage of favourable responses and a low or falling number is taken to be an early sign of a downturn in the economy. Consequently, investors follow this indicator closely in order to gauge the strength of the economy.
See the University of Michigan website for more information about this survey.
This figure is released monthly by the US Census Bureau and gives the value of sales made and inventories held by merchant wholesalers, adjusted for seasonal variations. The figures are also broken down according to subsets such as durable goods (that is, products intended to last three years or more), non-durable goods (such as food and clothing) and autos.
The figure is also presented as an Inventories/Sales ratio, which can be used as a measure of how long it would take to clear stocks at the current rate of sales. For example, in September 2006 the Census Bureau announced that in July 2006, sales of US wholesalers amounted to $331.7 billion, while total inventories were $382.0 billion at the end of the month. The Inventories/Sales Ratio was therefore 382/331.7 = 1.15.
Wholesale sales and inventories data does not usually have a dramatic or immediate effect on the bond or stock market, but data at this level, as opposed to at the consumer level, does offer an insight into the economy and can offer a foretaste of future consumer trends and comparing changes in the Inventories/Sales Ratio can provide useful indications of changes in the economy.
For example, a dropping Inventories/Sales Ratio caused by, say, unexpectedly high sales figures, suggests that manufacturers will have to increase production levels at some point if product shortages are to be avoided.
Conversely, an increasing Inventories/Sales Ratio points toward a requirement for a slow down in production in order to help ship out unplanned build-ups of inventory.
Reproduced courtesy IG Index
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