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How Markets React To Economic Indicators
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Economic indicators track activity judged to be significant to economic performance, by quantifying the various factors of supply and demand. Indicators can be used to both explain and to forecast price movement. To explain market prices, variables are measured concurrently with that price and are assumed to have high correlation. To forecast market prices, data from each indicator are viewed in relation to past data/price correlations, to data from other indicators and to the business cycle. Depending on the phase of the business cycle, different economic indicators are more or less able to delineate the pertinent market forces. Forecasts are only as strong as the data used to make them. No matter how accurate the estimates may be, most fundamental data is based on data samples. In addition, these estimates are usually subject to constant revision. Indicators can also be categorized as Leading Indicators, Lagging Indicators, or Coincident Indicators depending on whether changes in the indicator series happen before, after, or at the same time as changes in the economy. These categorizations can even be different depending on the phase of the business cycle. For example, a series tracking the number of people unemployed is categorized as leading for economic peaks, lagging for economic lows, and unpredictable for economic turns. The series tracking corporate net cash flow, on the other hand, is categorized as leading for economic peaks, economic lows, and economic turns.
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Market Impact of Economic Indicators With Respect
to Indicator Type and Market Consensus
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Market Consensus:
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Stronger or Larger Than Expected
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Weaker or Smaller Than Expected
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Type of indicator:
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inflation
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Bond Prices
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prices up
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prices down
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prices down
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prices up
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Stock Index Prices
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prices up
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prices down
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prices down
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prices up
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$ Exchange Rate
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prices up
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prices up
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prices down
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prices down
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Market reaction to economic indicators is determined by:
- Consensus -- the market consensus forecast
- Revisions -- how significant data revisions are in any previous periods
- Reliability-- the reliability and comprehensiveness of the specific economic indicator (breadth in coverage, depth of detail, and timeliness)
- Policy makers -- how important the indicator is thought to be to the policy makers (is Greenspan looking at it?)
Generally speaking, bond and currency markets tend to react more to the economic news than the stock indices, which also must take into consideration specific company and industry fundamentals. Bond Markets are concerned with the pace of economic growth and inflation. Stock Indices are concerned with earnings, which are driven by economic growth and the asset allocation implications from changes in interest rates. Currency Markets are concerned with the pace of economic growth, inflation, and foreign trade imbalances.
(877) VERDEO 1
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Real Estate Broker, CA Department of Real Estate License # 01857487
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