The key data and central banks events traders need to watch
Whilst some data are more important than others, traders should understand that economic announcements have the power to move financial markets. When it comes to trading the news, tier-one data are the most crucial releases on the economic calendar.
Here we explain the announcements that markets are most interested in. Announcements that move US equity markets, Treasury bond yields, and the US Dollar. There are also a few other releases to keep an eye out for too, that you may not always keep in mind that we also think are important.
- The Federal Reserve is all important
- Inflation is a key driver of the Fed’s decision-making
- The labor market is the other side of the Fed’s coin
- Growth data is crucial for the US economic outlook
Also, if you are interested in what’s going to be moving markets in the coming days, we’ve got that covered too.
The Federal Reserve is all important
The Fed, also known as the Federal Reserve, holds the distinction of being the world’s most influential financial markets institution. It serves as the central bank for the United States, which boasts the largest and most significant economy globally. The Fed is responsible for overseeing the US Dollar, which holds the position of the world’s primary reserve currency.
The Fed uses monetary policy to ensure economic stability within the US. The Fed employs various measures to respond to diverse economic situations. For instance, when the economy is overheating, and inflation is too high, the Fed will opt to tighten monetary policy by raising interest rates and selling bonds on their balance sheet. Conversely, when the economy is contracting, inflation is too low or unemployment is high, the Fed will loosen monetary policy by lowering interest rates or purchasing bonds.
Why is the Fed important?
The Federal Reserve plays a crucial role in setting monetary policy for the United States. This policy forms the foundation for pricing US Treasury bonds, which are widely considered a “risk-free” asset and serve as a benchmark for pricing various financial instruments, including loans, mortgages, and corporate debt. This applies not only in the US but also worldwide.
Moreover, the Fed’s decisions have a direct impact on the strength of the US Dollar (USD). According to the Bank for International Settlements’ latest data, the USD accounts for half of 88% of all foreign exchange transactions worldwide. As of 2022, the global forex market was valued at over $7.5 trillion per day.
A “dual mandate”
The Fed has a dual mandate which is to:
“promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”.
The dual mandate is the reason why traders consider US inflation and labor market data to be so important.
The FOMC and the “dot plots”
The Federal Reserve’s key decision-making body is called the Federal Open Market Committee (FOMC), comprising 17 members. This includes seven board members and twelve heads of regional banks. The FOMC is responsible for determining the interest rate level, commonly known as the Fed Funds rate, as well as the size of assets on the Fed’s balance sheet. The Fed can adjust the size of assets by purchasing or selling bonds.
While the seven board members hold a permanent vote on policy decisions, only five out of the twelve regional heads vote on a rotating basis. The selection of regional voters is rotated annually.
The “dot plots” are an important market-moving feature of the FOMC decision. Each FOMC member gives their projection of where they believe interest rates will be heading in the coming years. The mean level is taken by traders to be an indication of the outlook of the committee.
Other central banks to watch”
The Fed might seem all important, but other central banks are also important for financial markets. Here are some of the heavy hitters:
- The European Central Bank (ECB) – Setting monetary policy for the euro area, the ECB oversees an economy around two-thirds the size of the United States. It is a huge market to trade with the US and changes to monetary policy would impact the US economy. Subsequently, US markets do move on key decisions by the ECB.
- The Bank of Japan (BoJ) – Japan is the largest holder of US debt outside of the US. Changes to BoJ monetary policy could shift these holdings. This would impact US Treasury yields, the USD and US equity markets.
- The Bank of England (BoE) – The third of the three big central banks outside the US oversees the UK economy.
Inflation data drives the Fed
One part of the Fed’s dual mandate is to concentrate on price stability. In other words, to not let inflation get out of control. At a most basic level, inflation is the rise in prices over time. It also represents the change in purchasing power. As inflation rises, the purchasing power to buy a basket of goods will decline. One unit of currency will be able to buy fewer goods or services than it did previously. In effect, your money does not go as far as it did before.
Inflation can be measured in a variety of ways. The CPI is broadly viewed as being the most popular and widely followed measure. However, the Fed has a slightly different measure that it looks at…
- CPI (Consumer Prices Index) – The CPI is a measure of change in consumer prices of a basket of goods and services that is representative of the whole economy. It is widely followed by central bankers, economists and markets as being the primary measure of inflation.
- PCE (Personal Consumption Expenditure) – The PCE is a measure of consumer spending in the US that is used by the Federal Reserve as its favoured measure of inflation. The PCE accounts for around two-thirds of domestic spending in the US.
Why is US inflation important?
Fed has an inflation target that it looks to set its monetary policy to. Since 2012 its goal has been to get inflation to be stable at around 2%. So, if inflation is above 2% and it does not believe that it will be achieving its goal any time soon, this will likely result in higher interest rates.
Changes in interest rates impact bond yields (which derive loans and mortgage rates), the strength of the USD and the outlook for US equity markets.
US labor market data is also key
The other part of the dual mandate for the Fed is to maximize employment. This means that US labor market indicators will be watched by traders. Here are the key indicators:
- US Employment Situation report (also known as the Nonfarm Payrolls report) – is released usually on the first Friday of the month. The report includes data on nonfarm jobs growth, unemployment, labor force participation and wage growth.
- Weekly jobless claims – although not strictly tier-one data, being a weekly snapshot of trends in job losses means this is a lead indicator that traders should watch.
Why is US jobs data important?
If the labor market is deteriorating (joblessness is going higher) then it would suggest the outlook for consumer spending will be deteriorating. The consumer accounts for around two-thirds of the US economy, and being part of the Fed’s dual mandate, this will have a direct impact on monetary policy.
Economic growth data to watch
Economic growth is an assessment of the change in the size of the economy. The larger the economy, the stronger it is. The classic measure of growth is always taken by financial markets to be GDP (Gross Domestic Product).
However, for traders, the announcement of GDP can often be somewhat overlooked, as it is considered to be a particularly backward-looking data-set. Advance GDP is released about 30 days after the quarter’s end but is frequently subjected to revisions. Data on trade and inventories are incomplete and often estimated. Revisions are announced two or three months after the quarter’s end. Markets have moved on since then.
So what do traders follow instead for growth? This is where the PMI (Purchasing Managers Index) data comes in. For the US, we look at the flash PMIs and the ISM data as the crucial market-moving data. These are surveys of crucial purchasing managers and give a current view of the outlook of the economy.
- Flash PMIs – this is the first look that traders get at economic activity trends in the current month. They are announced in the final week of the month. These are followed just over a week later by the final PMIs (but by then the market impact will have been reduced).
- ISM – In the first week of the month, the Institute of Supply Management releases prior month surveys on manufacturing and services data. These are official surveys that markets pay attention to.
Why are the PMIs and ISM important?
They are surveys that are considered to be lead (or at least current) indicators of the outlook for the US economy. Trends in economic strength or weakness will paint a picture of how the US economy is developing. They will also play into the Fed’s thinking on monetary policy.
Subsequently, the surveys will impact US bond yields, the USD and equity markets.
What data should be watched in the days ahead?
The first week of the month is always jam-packed with tier-one economic data. However, with a raft of central banks on the docket, this week might prove to be more packed than normal. Elsewhere, for the key data, it is a mix of PMIs and Nonfarm Payrolls.
Central Banks to look out for
The Reserve Bank of Australia has already put the cat amongst the pigeons with a surprise 25bps rate hike, but there are two other central banks to watch for:
The Federal Reserve – On Wednesday May 3rd the Fed is expected to hike by 25bps. However, the message on further rate hikes will be important. The feeling is that this will be the last hike in the cycle, so any hints around pausing would impact the USD and Treasury yields
The ECB – The ECB is also expected to hike on Thursday May 4th, but it is unlikely to be the last, with one or potentially two further hikes likely over the summer. Mixed inflation data for April leaves the ECB open for more hikes.
PMIs and ISM on the docket
The US ISM Manufacturing for April was still in contraction below 50, with the outlook for new orders also still struggling. However employment stabilised and prices paid picked up, leading to a jump in US yields. The focus will be on the ISM Services on Wednesday, with the services sectors still suggesting only minimal expansion. Composite PMIs for the Eurozone and UK are final readings, so should only generate minimal market impact.
Nonfarm Payrolls will dominate Friday
The trends in the US labor market are beginning to reflect the strain of the most aggressive Fed policy tightening in four decades. The headline Nonfarm Payrolls growth is expected to moderate to less than 200,000 which would be the lowest since December 2020. It is also interesting to see the participation rate rising consistently in the past four months. It seems that the labor force is increasingly in need of work as inflation and high interest rates bite into the economy. This will play a role in helping to pull the unemployment rate higher in the months to come.
Steve Miley
Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.
