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11 Nov 2013

US data back in the spotlight

Stacy Williams

by Stacy Williams

Strategist

US data back in the spotlight

Understanding the impact of US data more fully is now crucial

Macro-economic data is important for financial markets, but the relationship between such data and markets is complex. Models that try to explain prices such as exchange rates with macro variables directly tend to perform poorly.

Markets often move significantly when new economic figures are announced but, in reality, it is the news or the “surprise” component of a data release that causes immediate reaction. Expectations of future releases are constantly being priced in to markets and deviations from these expectations dominate when the announcement is made.

The financial crisis changed how data was absorbed into markets and it has, by no means, fully normalised. But there is now a renewed emphasis on data. The US Federal Reserve has taken the unusual step of linking its decisions on monetary policy directly to economic variables such as the unemployment rate.

Markets often move significantly when new economic figures are announced

So understanding the impact of US data more fully is now crucial. We have examined how different asset classes have traditionally responded to data, and how the financial crisis changed that behaviour. We also look below at the state of play today – which markets are most responsive and which economic variables are most important.

Which US data now matters most? Non-farm payroll figures have long been considered the most important individual economic data release and rightly so. The impact of payrolls has been consistently strong and continues to be strong today.

This is in marked contrast to the impact of the US unemployment rate. A strong negative relationship through time might have been expected, but this is not borne out by the data. In fact, recently the relationship is the wrong way round.

This is pertinent, given the stated importance of the unemployment rate by the Fed. It means the headline number alone is of little immediate relevance to the market, probably because of problems in interpreting the release caused by the changing participation rate as would-be workers drop in and out of the jobs market.

Payroll data is easier to interpret and still dominates.

Data to watch:
The dollar, historically, has generally strengthened against other major currencies on the back of strong US data. This behaviour reversed during the financial crisis as the dollar acquired safe-haven characteristics but it is starting to behave more normally again.

  • The relationship between emerging-market exchange rates and the dollar is returning to some normality too – though these currencies are especially sensitive to talk of US tapering.
  • The two-year US bond yield has historically been most responsive to data but the impact weakened substantially as the financial crisis developed. Normalisation hasn’t happened yet, but this is one to watch.
  • Equities were fairly unresponsive to economic data before 2007 but became much more influenced at the height of the crisis. Now, normality, as far as data-sensitivity is concerned, appears to be returning.
  • US non-farm payroll data remains the major release to watch.
  • Unemployment-rate data does not have a clean impact on markets, despite it now being more explicitly targeted by the US Fed: the headline number can be misleading as numbers seeking work fluctuate.
  • Housing starts and new-home sales have soared in importance, strongly suggesting that the market sees new housing activity as a sign of genuine recovery.
  • The Chicago Purchasing Managers’ Index, however, has dropped significantly in importance.

This research was first published on 25 October 2013.
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