by Tip a Tip Contributor on November 20, 2009
Consensus Forecasts
On a weekly basis, news services covering the business sector contact economists whose job entails forecasting the upcoming economic indicator values. These economists perform a various statistical analysis in order to predict where the next indicator value is likely to land. Typically, these economists work for the big banks or investment firms, but many are independent advisors. The news services then compile the results of their conversations with the economists and they typically publish them the Friday before. What they publish is called the consensus forecast, and really is simply the median forecast for the indicator value.
The median forecast is the number that falls in the middle; half above, half below. Note that the median is not the average. The average value can be easily skewed by outlying forecast numbers, whereas the median is not.
Traders will act on any information that they think will move the market, and certainly consensus forecasts do just that. They don’t wait on the actual news release to make their move in the market. Traders use forecast numbers. The median forecast typically moves the markets long before the actual indicator comes out. Subsequent to the release of the actual indicator, movement in the market will usually ensue only if the official number differs markedly from the consensus number.
How does that work? Traders will often position themselves before the release based on their analysis of whether an indicator is going to be at, above, or below market expectations. Thus, moving the market comes down to whether the indicator ends up being above expectations or falls below them.
The median forecast certainly determines the consensus forecast; however, equally important is the range of those forecasts. The range establishes the low and the high forecast. An economic indicator that end up either above or below the forecast range will, in all likelihood, move the market more significantly than would a number that falls within the expected range. Thus, the range is another figure that needs to factor into your radar, in addition to the median, or consensus forecast.
News And Economic Indicators
Economic indicators are not the only game in town that can affect the markets. Other news can magnify or nullify the effects of economic indicator information. In fact, another indicator, held in higher importance, or delivering significantly better (or worse) news coming out at around the same time or the same day at least, can have a significant impact. An example of this would be housing starts. If information on that economic indicator comes out on a Thursday morning then that indicator will end up competing against the weekly initial jobless claims report. Economic indicators do not have a monopoly on schedule, so more than one indicator may be released at the same time.
Company news during earnings season can have quite an impact the financial markets. The earnings season is the period shortly after the end of a quarter, when publicly traded companies announce their earnings and revenues for the quarter that just ended. Analysts have put together expectations for earnings and revenues and in all likelihood, company stock prices have those expectations already built in prior to the quarterly numbers being announced. Thus, the first six weeks of a quarter are considered the most significant of earnings season.
Another source of information that could potentially nullify the effect of economic indicators are the words that are coming out of the Fed’s mouth. This happens when a Federal Reserve official, typically those in high office such as the chairman or a regional Fed president, delivers a speech on the economy and/or interest rate policy. A speech that provides insight on whether the Fed is going to raise or lower interest rates more often than not significantly move the markets.
by Tip a Tip Contributor on November 20, 2009
Want to get in on the excitement when news releases on economic indicators come out? How do you make sure that you are in on the excitement when economic indicator news is released? You will be glad to know that the release of information on economic indicators follows a defined schedule. This schedule has been refined over many years and is adhered to by those responsible for releasing the information to the public. It pretty much defines a drop dead deadline for those in the government to complete and release the information for the given economic indicator for which they are responsible.
To make things very clear, the agencies responsible for creating the economic indicators typically announces a release schedule a year in advance. The resulting release dates for the most part fall within the same three or four days each calendar month because they are described by occurrences rather than hard dates; for example, the employment situation report can be expected the first Friday of each month, while the industrial production report goes out on the ides of March.
The New York Fed has a typical calendar of releases on their site: http://www.newyorkfed.org/research/national_economy/nationalecon_cal.html
Monthly and weekly indicators pretty much follow the same timing each month. In addition, only first and second tier indicators are provided and the schedule is only for monthly or quarterly indicators.
Why is the order of release of indicator information important month after month? The order is critical because some indicators serve as input to the development of other indicators; that is, some indicators help in the forecast of other indicators. In future posts, we will reveal which economic indicators help to forecast others. The economic indicators also help deliver a logical picture of the economic landscape, with later delivered indicators building upon what can be gleaned from previously released indicators. The relative strength of any given sector can be gauged, in terms of improvement or otherwise. Today, many are watching the housing sector to see if it is improving; ditto customer spending. Each subsequent month brings additional information that helps paint a trend, and may help in terms of providing a hint as to what tomorrow will bring.
Economic Calendars on the Web
The web has numerous resources that you can use to track economic indicator schedule releases. Most will forecast the main economic indicators and even second or third tier indicators. You will want to evaluate if the site has at least these four types of information: the raw numbers pertaining to the indicator, an analysis of the indicator, a consensus forecast pre-announcement, and frequently updated headline news.
You may find that to receive streaming headline news, you will need to join a premium website. What this means is that the moment the indicator announcement is made public, that information is streamed directly to you as a subscriber. The stream in near-instantaneous, because reporters actually get a chance to see the report approximately half an hour before the official release. This affords them time to write their story, but they are, in a sense, "locked up" until the actual published release time. This is why you get the information, as well as an accompanying story, mere moments after the published release time. The agencies responsible for the numbers clear some reporters, which allows them to write the story and simply click "send" so to speak when the release is officially public.
For premium streaming service, you may want to look at Market News International (MNI) and Reuters IFR Markets. In addition to real-time news, they also have calendars and other tools that appeal to people who play the markets. Full service is steep for the casual user such as a beginning investor or a student of the markets.
Other competing, but not quite as comprehensive sites may be a better bet for the casual user. Some of these sites include:
Bloomberg: http://www.bloomberg.com/markets/ecalendar/index.html
CNBC: http://www.cnbc.com/id/15839153
MarketWatch: http://www.marketwatch.com/economy-politics/calendars/economic
In our next post, we will look at consensus forecasts, and other news that can go along with, or against economic indicators, in terms of impacting the financial markets.
by Tip a Tip Staff on November 19, 2009
Getting to Know Economic Indicators
First things First. What do we mean by economic indicators? In reality, it really is not that complicated. Economic indicators are simply statistics that tell you in what direction our economy is headed. It reveals growth, stagnation or contraction. Some examples of economic indicators that you may heard being tossed around are gross domestic product, money supply and here’s one everyone pays attention to lately, unemployment rate. These are all economic indicators, but there are a whole bunch more.
Thus, when economic indicators are released for public consumption, we are able to discern where the economy might be headed. Of course, the financial markets and the legions of droids that follow it begin buzzing with excitement. It doesn’t take much to get these guys going. So, why the excitement? What are these people looking at that is so good?
Economic indicators, in conjunction with other news or sometimes all by itself, can impact the stock, bond and other financial markets at the moment the information goes public. In addition, some economic indicators paint a picture of the economy over the long and short term. In turn, that may affect businesses, jobs and investments. Therefore, economic indicators are highly anticipated and followed by the financial world.
The Tiered Effect
Economic indicators are informally classified into tiers, with the first, second and third on the radar of most in the financial community. First tier indicators are proven market movers, and are highly anticipated and heavily utilized by traders. The constituents of the first tier varies from one analyst to the next, but in general, the following are considered first tier by nearly everyone: employment, Federal Open Market Committee policy announcements, gross domestic product, personal income report, housing starts, consumer and producer price index, retail sales and durable goods orders. Like I said, the list is not formal and varies a bit from one analyst to the next.
Second and third tiers are even more arbitrary, and the attention that indicators in each vary greatly as well. An example of a second tier indicator may be initial jobless claims, which some watch, while others ignore. Specialists typically are the niche players that pay attention to third tier indicators, such as the natural gas inventory report.
Don’t worry if you are not familiar with the terms presented here, as they will be covered in subsequent posts. Stay tuned for more.