In the last article for your investment training we talked about what central banks are, their main functions and which ones are the most important. Among other functions, banks are responsible for the monetary policies of countries or regions of the world, which act as catalytic events when they come together to make decisions about their respective economies. Within this topic we can also find macroeconomic indicators, precisely the topic that we will discuss in this investment training.
What are macroeconomic indicators?
Economic indicators will be the topic we will discuss in this investment training. These indicators are reports with statistical or informative data that help us see how the economy of a specific sector, country or region is developing. These types of financial indicators help us analyze the performance of an economy or sector with past data or future forecasts that determine their economic health. To give an analogy, we could say that these reports show us the operating status of each part of a large machine, some of which may have more impact on the general operation of all of them. In turn, these indicators help us take advantage of moments of volatility in the financial markets. This is because the publication of certain data (prior to its publication) already generates a wave of speculation that can be discounted before or at the time of being announced.
What types of macroeconomic indicators are there?
Macroeconomic indicators are mainly differentiated by a series of factors that we have discussed in the previous paragraph, such as the country, region or sector from which the data or reports come. These reports or data that make up the macroeconomic indicators vary in the publication periods, since there may be weekly, monthly or quarterly publication reports. We can categorize macroeconomic indicators into two types:
Forward-looking indicators.⏩
Leading indicators are those that anticipate future results that may arise. Basically they are those that are based on a future forecast to try to determine where an economy or sector could go. For example, decisions on interest rates or the bond yield curve are forward-looking indicators.
Retrospective indicators.⏪
Lagging indicators are those that are based on observing the historical performance of the data, which only changes when a trend has been identified. They allow us to confirm whether the trend that has been identified has strength or whether it has weakness. For example, the inflation rate, gross domestic product (GDP), or labor market reports are lagging indicators. At the same time, we also have the matching indicators, which are data or reports that show us events in real time.
What are the most important macroeconomic indicators?
Within the macroeconomic indicators we can find hundreds of data or reports that are published throughout the year, but not all of them affect the economies or sectors in the same way. Let's continue this investment training by listing the most important macroeconomic indicators to take into account for our operations:
Gross Domestic Product (GDP).
The gross domestic product shows us the value of all the goods and services produced in a country. Thanks to this data we can compare how global economies are developing and try to make a future prediction about their future growth. GDP has a direct effect on other types of indicators that we will discuss in the following paragraphs, such as the labor market, which is based on hiring and unemployment reports.
The problem with this indicator is that it lacks clarity in the figures, given that the application of expansive or restrictive monetary policies can positively or negatively influence the figures presented. In detail, constant GDP growth is a good sign that an economy is growing at a good pace. On the other hand, if we witness accelerated GDP growth, it may end up not being sustainable.
Consumer Price Index (CPI).
The consumer price index shows us the changes in the costs of services and products in a given period. These data are usually published monthly, which show us their monthly, quarterly or annual development. Each country or region has its own consumer price index, which ends up affecting different sectors to a different extent, given that there are some that can pass the costs on to their clients and others that are affected by them. This indicator is directly related to the development of inflation rates.
Inflation rate.
Inflation, which we have seen even in the soup during 2022, is data that shows us the growth or slowdown in the price of services and goods in a country or region. Inflation directly affects many factors of the economy, such as currencies (referring to purchasing power), the labor market and the development of GDP. In turn, inflation is regulated through the application of interest policies, which we will discuss below.
Non-farm payrolls (NFP).⚒️
The non-farm payrolls (NFP) report is one of the most important indicators of the United States economy. This indicator shows us the total number of workers hired within the country, excluding farmers, state officials and non-profit organizations. Therefore, it is an important indicator since it provides us with information about the total number of people employed and, therefore, who contribute to the growth of the economy.
A report with hiring growth similar to or above the forecast translates as good news for the economy. On the other hand, if the report shows negative data, it ends up having a direct impact on the economy, since it may give signs of economic slowdown.
Unemployment benefit applications.
The unemployment benefit applications report is the antonym of the indicator that we just discussed in the previous point. Unlike the non-farm payrolls report, this indicator is based on surveys carried out each month that determine how many people are unemployed and actively searching for work during said period. Therefore, as we have seen with the NFP, if applications for unemployment benefits decrease, it means that there are fewer people unemployed and therefore, the economy will perform better.
Interest rates.➗
Interest rates (as we explained in the last article on investment training) are one of the tools of monetary policies that are responsible for controlling the supply of capital in the market through application of interest rates.
These directly affect the cost of money and the prices of capital lent by central banks to private banks (commercial banks) and the interest rate they will receive on bank deposits. With the application of these interest rates, private banks establish their interest rate policies towards the public, such as mortgage loans and savings accounts.
Retail sales.
The retail sales report is another of the most important indicators to take into account. This is because it records data on sales of services and goods by consumers and businesses. Consumption is a fundamental piece for the advancement of economic activity due to its impact on different sectors. For example, an increase in retail sales tells us that the economy is in a period of prosperity, where consumers can consume goods and products that are not essential, which in turn translates into an increase in GDP of a country or region.
On the other hand, in periods of uncertainty or economic recession, consumers become more cautious, which causes consumption to decrease and in turn negatively affects certain sectors and the GDP of a country or region. Of course, it should be noted that this data may be inaccurate given that retail sales may continue to rise due to the increase in requests for bank loans to continue consuming regardless of the situation of the economy.
Building permits.️
The construction permit report is one of the indicators that allows us to anticipate the future of the real estate sector. This report tells us how many companies have requested permits to build new homes (6 months before starting work), which translates as a positive sign for the real estate market. On the other hand, when construction permits decrease, it can indicate that uncertainty about the real estate market begins to arise. At the same time, we have sales reports on new and second-hand homes.
These two reports show us the figures for new homes awarded and the number of sales of second-hand homes. These two reports go hand in hand, since an increase in the number of new home sales and a slowdown in second-hand home sales tells us that the economy is in good health. On the other hand, if sales of new homes decrease and second-hand sales increase, it means that the economy could be showing signs of slowing down.
Inventories/production of raw materials.️
Inventories and production of raw materials are two of the indicators that influence different sectors of the stock market and economies. Mainly raw materials are necessary for industrial production and for the energy sector. Raw materials such as wood or iron allow us to identify if the economy is healthy, given that they are two of the materials necessary for the construction of infrastructure, just as copper is considered the “thermometer” due to its use in different industries. .
The latter will also be necessary for the energy transition towards renewable or non-polluting energies, such as electricity. Within the energy sector, both inventories and production of natural gas and oil influence. The latter influences OPEC's decisions quite a bit, as we have been able to witness throughout 2022. It is also made up of agricultural raw materials, such as coffee, soybeans, wheat, palm oil, which They are basic consumer products.
Bond yield curve.
The bond yield curve is another indicator that allows us to predict the future of an economy. The bond yield curve is made up of lines that represent the profitability of bonds of different maturity dates, differentiating between short-term bonds (affected by interest rates) and long-term bonds (affected by interest rates). interest rates, inflation and the state of the economy). In theory, bond yields should have an upward slope, although depending on the state of the economy they may differ.
In times of uncertainty the bond yield curve usually flattens. Warning signs on the bond yield curve come when we see that short-term bonds offer better returns than long-term bonds, as this tells us that investors expect the economy to slow down. On the other hand, when we see that the curve offers better returns for long-term bonds than for short-term bonds, it means that investors are confident in the growth of the economy.
Manufacturing index.
The Manufacturing Production Index (PMI) is an indicator designed to give us an overview of activity in the manufacturing sector and acts as a leading indicator of the economy. Within the PMI we can find different types, such as New orders, production, occupation, supplier delivery terms and purchasing stock. When the MPI is less than 50, it indicates that the manufacturing economy is slowing, while a value above 50 indicates that the growth of the manufacturing industry is slowing.
Conclusions from this training in investment on macroeconomic indicators.
After concluding this investment training on macroeconomic indicators, we are going to review the most important points. As we have explained, these indicators are made up of reports or statistical data that can be published monthly, quarterly or annually. In turn, we can identify both indicators that anticipate the future through predictions or indicators that measure the historical context of the data or reports regarding the current situation. We have also listed a list with the most important types of macroeconomic indicators to take into account in order to take advantage of them in our operations.
These indicators allow us to take advantage of the volatility caused by these, which are considered catalytic events. This is because they are events that, prior to their publication, already move the markets by discounting the news or taking advantage of the volatility they cause when they are published. It should be noted that we have to be critical when analyzing the data, given that sometimes the information they provide us is not based on complete accuracy of the facts. As always, we remember that we must use these indicators to be able to have more confirmation signals within our operations, but in no case completely base our operations without first learning how each one influences each sector, country or region.