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.