High Impact Market News
- Steve
- Apr 3, 2023
- 2 min read
Some traders trade based on market news, going long or short based on various economic releases throughout the year. Others make sure to be aware of any major releases so that they can trade around them, avoiding being in a position during such times as volatility is sure to increase.
The reason almost all of these are important is because of their predicted effect on interest rates. If CPI (inflation) is high, it's typically good for the currency of that country from a traders point of view because their central bank will have to increase interest rates. If unemployment is high, the country will consider fiscal spending, and/or lower interest rates. Likewise, inflation below 2% can be a sign of low economic growth, and foreshadow upcoming government spending and monetary easing.
I personally check https://www.forexfactory.com/calendar regularly and set the filter to only show medium and high impact events. You can click on the folder icon beside each release for a short description of it. The agency responsible for data collection on each also provides a forecast, and if these forecasts are over- or under-shot, it can lead to some volatile price action.
CPI/PCE
CPI is the Consumer Price Index. It monitors changes in the price of goods and services for consumers over time. Most governments nowadays have a 2% inflation target. That is, over the medium-term, inflation should average around 2%. The CPI tells us about price rises being passed on to the consumer. Price rises ARE inflation. When prices rise, people seek raises at work, resulting in wage-price spirals etc. The main takeaway from the CPI reading is that, if it is trending up, above 2% over time, the central bank in line with its mandate will have to tighten monetary policy and raise interest rates in that country. By raising interest rates, holding the currency is more attractive to investors.
PCE is Personal Consumption Expenditures. It is a measure of the value of goods and services purchased by households. Similar to the CPI, when the PCE is trending upwards, it represents increased costs to the consumer - and increases the likelihood that monetary tightening will be necessary in the future.
The CPI typically makes for good headlines, but central banks have been known to favour PCE when looking at the health of the economy. PCE represents the majority of total economic activity and is based on actual household spending, rather than a basket of predetermined goods. In other words, the CPI assumes that, when prices of certain goods go up, you continue to buy them and don't cut down or substitute to something else. PCE reflects actual expenditure.
Core CPI/PCE
The Core measure of each of the above excludes both food and energy prices, which are considered to be volatile. It's gives a better idea of underlying inflation trends.
The core CPI excludes food and energy prices from its calculation, while the core PCE excludes both food and energy prices as well as indirect taxes and government subsidies.
As mentioned, central banks consider the PCE more robust than CPI, and taking this further still, Core PCE is a very important measure for them.
GDP
Gross Domestic Product measures the change in the total value of all goods and services produced by an economy.
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