Understanding Economic Indicators
The key to knowing where, as a trader, you are during the business cycle
is watching the economic indicators. Every day you open your newspaper,
you see at least one story about how the economy is doing based on various
economic indicators. Popular indicators track employment, money supply,
interest rates, housing starts, housing sales, production levels, purchasing
statistics, consumer confidence, shipping, and many other factors that indicate
how the economy is doing.
Economic indicators are useful to your trading. Some are definitely more
useful than others. We don’t have the space here to describe each of the indicators;
instead, we focus on the ones that can provide you with the most help
in making your trading decisions.
is watching the economic indicators. Every day you open your newspaper,
you see at least one story about how the economy is doing based on various
economic indicators. Popular indicators track employment, money supply,
interest rates, housing starts, housing sales, production levels, purchasing
statistics, consumer confidence, shipping, and many other factors that indicate
how the economy is doing.
Economic indicators are useful to your trading. Some are definitely more
useful than others. We don’t have the space here to describe each of the indicators;
instead, we focus on the ones that can provide you with the most help
in making your trading decisions.
BoC and Fed watch: Understanding how interest rates affect markets
Watching the Governor of the Bank of Canada and the Federal Open Market
Committee (FOMC) of the Federal Reserve (which includes the seven members
of the Board of Governors, the president of the New York Federal
Reserve Bank, and presidents of 4 of the other 11 Federal Reserve Banks) and
tracking what it may or may not do to interest rates is almost a daily spectator
sport in the business press. Although members of the FOMC meet only
eight times per year, discussions about whether the Bank of Canada and the
Federal Reserve will raise or lower interest rates serves as fodder for stories
published on at least a weekly, if not daily, basis. Every time BoC Governor
Mark Carney or Fed Chairman Ben Bernanke speaks, people look for indications
of what the BoC or the Fed may be thinking. Speeches by other members
of the BoC staff or the Fed likewise are carefully dissected between
FOMC meetings. Most press coverage will shortcut all this by saying the BoC
or the Fed may raise or lower interest rates.
The Canadian and U.S. economies tend to move in lock step, so the perception
is for monetary policy in both countries to go in the same direction.
However, that has been less true since late 2000, when the Bank of Canada
established eight pre-set dates per year to announce its key interest rate
policy. This schedule is referred to as the BoC’s fixed announcement dates,
or fixed dates. In setting interest rates, Canada has recently tended to focus
more closely on the inflation rate than the United States, which tends to be
concerned with employment.
Because the Canadian economy is inextricably linked with the U.S., our
manufacturing costs and output are structured around a Canadian dollar
valued at a discount against the U.S. currency. The Canadian dollar is often perceived as a petro-currency by international investors: it fluctuates with oil and gas commodity prices. When the interest rate policy also starts to attract investors to Canada, the effect of a strong loonie is a struggle for our exporters.
Higher interest rates and high energy prices causing a high currency
exchange rate further increase the cost of our exports.
Therefore, Canadian interest rate policy is crafted with an eye to U.S. rate
policy. Canada must be aware of U.S. interest rates in order to stay competitive
with the potential of expanding exports to the United States. So that we
are not totally dependent on our southern neighbour, we undertake regular
trade missions to the growing markets across the Pacific.
The key reason for you to be concerned is that a change in interest rates can
have a major impact on the economy and thus on how you make trades. An
increase in rates is likely to slow down spending, which can lead to an overall
economic slowdown. For the most part, when the BoC or the Fed raises interest
rates, it’s because the board believes the economy is overheated, which
can fuel the risk of inflation. An increase in interest rates can reduce spending
and thus ease overheating. If, on the other hand, the BoC or the Fed fears an
economic downturn or is trying to fuel growth during a recession, the board
frequently decides to cut interest rates to spur spending and growth.
The Bank of Canada’s policies and strategies can be gleaned from its quarterly
Monetary Policy Report. The current economic state of the nation and
implications for inflation are covered at length. The information at www.
bankofcanada.ca dates back to 1995.
Speeches by the BoC Governor and Deputy Governor are also listed at this
informative Web site. The speeches often are made at the press conferences
that accompany the Monetary Policy Report or an opening statement to a
Standing Committee of the Senate or House of Commons.
For the American perspective, you can get a good hint about what the Fed
is thinking by reading the Beige Book, which is a report compiled by the 12
federal reserve banks. Summaries about current economic conditions in
each of the 12 districts are circulated to Federal Reserve Board members two
weeks prior to the FOMC meeting, at which monetary policy, including interest
rates, is set. The summaries are developed through interviews with key
business leaders, economists, market experts, and others familiar with each
individual district. You can read the Beige Book online at www.federal
reserve.gov/FOMC/BeigeBook/2008/. Find out about past FOMC statements
at www.federalreserve.gov/fomc. These links give you access not
only to current issues of the Beige Book and FOMC statements but also to
information from those two sources dating back as far as 1996. They can provide
an excellent overview of economic trends and possible shifts in Federal
Reserve monetary policy.
Watching the Governor of the Bank of Canada and the Federal Open Market
Committee (FOMC) of the Federal Reserve (which includes the seven members
of the Board of Governors, the president of the New York Federal
Reserve Bank, and presidents of 4 of the other 11 Federal Reserve Banks) and
tracking what it may or may not do to interest rates is almost a daily spectator
sport in the business press. Although members of the FOMC meet only
eight times per year, discussions about whether the Bank of Canada and the
Federal Reserve will raise or lower interest rates serves as fodder for stories
published on at least a weekly, if not daily, basis. Every time BoC Governor
Mark Carney or Fed Chairman Ben Bernanke speaks, people look for indications
of what the BoC or the Fed may be thinking. Speeches by other members
of the BoC staff or the Fed likewise are carefully dissected between
FOMC meetings. Most press coverage will shortcut all this by saying the BoC
or the Fed may raise or lower interest rates.
The Canadian and U.S. economies tend to move in lock step, so the perception
is for monetary policy in both countries to go in the same direction.
However, that has been less true since late 2000, when the Bank of Canada
established eight pre-set dates per year to announce its key interest rate
policy. This schedule is referred to as the BoC’s fixed announcement dates,
or fixed dates. In setting interest rates, Canada has recently tended to focus
more closely on the inflation rate than the United States, which tends to be
concerned with employment.
Because the Canadian economy is inextricably linked with the U.S., our
manufacturing costs and output are structured around a Canadian dollar
valued at a discount against the U.S. currency. The Canadian dollar is often perceived as a petro-currency by international investors: it fluctuates with oil and gas commodity prices. When the interest rate policy also starts to attract investors to Canada, the effect of a strong loonie is a struggle for our exporters.
Higher interest rates and high energy prices causing a high currency
exchange rate further increase the cost of our exports.
Therefore, Canadian interest rate policy is crafted with an eye to U.S. rate
policy. Canada must be aware of U.S. interest rates in order to stay competitive
with the potential of expanding exports to the United States. So that we
are not totally dependent on our southern neighbour, we undertake regular
trade missions to the growing markets across the Pacific.
The key reason for you to be concerned is that a change in interest rates can
have a major impact on the economy and thus on how you make trades. An
increase in rates is likely to slow down spending, which can lead to an overall
economic slowdown. For the most part, when the BoC or the Fed raises interest
rates, it’s because the board believes the economy is overheated, which
can fuel the risk of inflation. An increase in interest rates can reduce spending
and thus ease overheating. If, on the other hand, the BoC or the Fed fears an
economic downturn or is trying to fuel growth during a recession, the board
frequently decides to cut interest rates to spur spending and growth.
The Bank of Canada’s policies and strategies can be gleaned from its quarterly
Monetary Policy Report. The current economic state of the nation and
implications for inflation are covered at length. The information at www.
bankofcanada.ca dates back to 1995.
Speeches by the BoC Governor and Deputy Governor are also listed at this
informative Web site. The speeches often are made at the press conferences
that accompany the Monetary Policy Report or an opening statement to a
Standing Committee of the Senate or House of Commons.
For the American perspective, you can get a good hint about what the Fed
is thinking by reading the Beige Book, which is a report compiled by the 12
federal reserve banks. Summaries about current economic conditions in
each of the 12 districts are circulated to Federal Reserve Board members two
weeks prior to the FOMC meeting, at which monetary policy, including interest
rates, is set. The summaries are developed through interviews with key
business leaders, economists, market experts, and others familiar with each
individual district. You can read the Beige Book online at www.federal
reserve.gov/FOMC/BeigeBook/2008/. Find out about past FOMC statements
at www.federalreserve.gov/fomc. These links give you access not
only to current issues of the Beige Book and FOMC statements but also to
information from those two sources dating back as far as 1996. They can provide
an excellent overview of economic trends and possible shifts in Federal
Reserve monetary policy.
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