The Impact of Economic Indicators on Trading

Created: 16th May 2023

economy trading

Economic indicators can be valuable for traders looking to capitalize on past events, trends, and future market predictions. External factors, such as interest rates, inflation, and unemployment, can greatly impact global markets. In this article, we will focus on some of the most crucial economic indicators for investors and traders in the UK, which can be applied to countries worldwide. 

These macroeconomic indicators play a crucial role in helping traders understand the current state of the markets and economy in their country. As a form of fundamental analysis, they aim to evaluate the intrinsic value of a financial instrument for trading, which can fluctuate due to corporate and governmental changes. It is essential to keep track of market changes and trends to manage trading positions effectively. Traders can use these indicators to create an effective event-driven investing strategy.

Economic indicators fall into two categories, "leading" or "lagging." Lagging indicators confirm long-term market trends that have already occurred, while leading indicators look towards future events and outcomes. It is advisable to combine both types of economic indicators to create a comprehensive trading strategy that identifies past results and makes new predictions. 

Some of the most important macroeconomic factors affecting how traders and investors view the financial market include employment, inflation, consumer activity, and interest rates. Macroeconomic events can significantly influence event-driven trading strategies, and the Office for National Statistics (ONS) in the UK is the primary institute for statistics and usually publishes most economic indicator reports. These factors impact both developed and emerging economies. In the US, the Federal Reserve and the Federal Open Market Committee (FOMC) usually manage the economy. 

Economic indicators 

Leading economic indicators 

The ADP national employment report is a widely tracked employment indicator in the US, second only to the non-farm payrolls report. It is considered a comprehensive measure of job creation and an increase in this figure signals a growing employment market and possible inflationary pressures that could lead to rate hikes. The report is released monthly and measures the estimated change in employment in the US, excluding farming and government sectors. 

Business inventories are also an important economic indicator that often reflects turning points in the economy. Low inventories can indicate a potentially thriving economy as businesses need to replenish their stock rooms, leading to higher production. Conversely, high inventories combined with low sales indicate a slowing economy as wholesale orders decrease, slowing production. Business inventory reports are released monthly and measure the change in the value of unsold goods held by manufacturers, wholesalers, and retailers. 

Consumer credit is an indicator that corresponds with a country's consumer confidence and spending. An increasing consumer credit figure suggests that lenders are more comfortable issuing loans, and consumers are more confident in their financial positions and thus more likely to spend money. This report is released monthly and measures the change in the total value of outstanding consumer credit that requires installment payments. 

The Consumer Price Index (CPI) serves as the primary measure of inflation, both at the consumer and producer levels. Central banks use CPI to decide on official interest rates and to index pensions, wages, and benefits. 

The ONS releases the CPI report monthly, tracking changes in the cost of living by monitoring the price of a basket of goods and services commonly used by households. 

The Current Account report measures the flow of goods, services, transfer payments, and income into and out of a country. A positive value indicates that the flow of capital into the country exceeds the capital leaving, while a negative value reflects a current account deficit. Ongoing deficits can weaken the country's currency. Current Account reports are released quarterly. 

Gross Domestic Product (GDP) is perhaps the broadest indicator of overall economic activity and growth. The advanced GDP version tends to have the most impact on the market as it is the first to be released, while the final version reflects the change in the value of all final goods and services produced in the country. GDP reports are released quarterly. 

Import Prices have an impact on both consumer and business inflation as they affect the cost of imported goods and services. Higher import prices lead to increased costs for businesses and consumers. Import Prices are released monthly, measuring the change in the prices of imported goods and services.