UNDERSTANDING
FUNDAMENTAL ANALYSIS
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AUTO
SALES
Car sales are tremendously important to the
US economy but their volatility can make them
an unreliable indicator. New models introduced
at the end of summer and in early spring tend
to have a disproportionate influence on sales
figures. That said, strong figures are a good
sign that consumer demand is picking up. They
can be seen as indicating higher future production
if demand is sustained over three or four months.
The size of the item in question and the timeliness
of the release allow auto sales to be a useful
leading indicator of retail sales and personal
consumption expenditures data.
Release Date: Around the 13th of each month |
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BALANCE
OF PAYMENTS (BOP)
The Balance of Payments (BOP) is the method countries
use to monitor all international monetary transactions
at a specific period of time. Usually, the BOP is
calculated every quarter and every calendar year.
All trades conducted by both the private and public
sectors are accounted for in the BOP in order to determine
how much money is going in and out of a country. If
a country has received money, this is known as a credit,
and, if a country has paid or given money, the transaction
is counted as a debit. Theoretically, the BOP should
be zero, meaning that assets (credits) and liabilities
(debits) should balance. But in practice, this is
rarely the case and, thus, the BOP can tell the observer
if a county has a deficit or a surplus and from which
part of the economy the discrepancies are stemming.
BALANCE
OF TRADE
The largest component of a country's balance of payments.
It is the difference between exports and imports. Debit items
include imports, foreign aid, domestic spending abroad and
domestic investments abroad. Credit items include exports,
foreign spending in the domestic economy, and foreign investments
in the domestic economy. The US merchandise trade balance
has been in a deficit since the mid-1970s. Rising deficits
can be reflective of increased consumption, which can be a
sign of a strengthening economy.
Release Date: Around the 12th of each month
BEIGE
BOOK FED SURVEY
Officially known as the Survey on Current Economic Conditions,
the Beige Book is published eight times per year by a Federal
Reserve Bank, containing anecdotal information on current
economic and business conditions in its District through reports
from Bank and Branch directors, and interviews with key business
contacts, economists, market experts, and other sources. The
Beige Book highlights the activity information by District
and sector. The survey normally covers a period of about 4-weeks
in duration, and is released two weeks prior to each FOMC
meeting, which is also held eight times per year. While being
deemed by some as a lagging report, the Beige Book has usually
served as a helpful indicator to FOMC policy decisions on
monetary policy. The Beige Book isn't considered to be a big
market mover. It is a gauge on the strength of the economy
and not a commentary on the views of Fed members. Occasionally
it can move markets if the findings are a big surprise from
analyst expectations.
Release Date: Two Wednesdays before every FOMC meet. 8 times
a yr
BUSINESS
INVENTORIES AND SALES
Business inventories and sales figures consist of data from
other reports such as durable goods orders, factory orders,
retail sales, and wholesale inventories and sales data. Inventories
are an important component of the GDP report because they
help distinguish which part of total output produced (GDP)
remained unsold. As a result, this presents us with important
clues on the future direction of the economy. Before computerization
allowed companies to trim inventories and use minimal stock
on hand, inventory build up was indicative of falling demand
and potentially a recession. If inventories decline significantly
over a three month period it is an indication that demand
has picked up and that production will have to increase to
restock.
Release Date: Second Friday of each month
CAPACITY
UTILISATION
Measures how much of the productive potential of the economy
is being used. A level of 85% is a good balance of growth
and inflation; anything above this level raises inflationary
fears.
Release Date: Around the 14th of each month
CBI
SURVEY
Britain’s largest organisation of business employers,
aims at creating and sustaining favourable conditions for
their optimal competition and prosperity. The CBI publishes
monthly and quarterly surveys, on past, current and future
assessments on the manufacturing and services sectors. The
indexes reflect respondents’ views on various items
such as, output, sales, prices, inventories, and export/import
orders.
Release Date: Around the 27th of each month
CHICAGO
PMI
A survey of Chicago-based managers, which covers, prices,
durable goods orders and inventories. It is closely watched
since it is announced before the National Association of Purchasing
Managers' index (NAPM). The Chicago figure gives a good idea
of what the national figure will be.
Release Date: Around the end of each month
CONSTRUCTION
SPENDING
Construction spending data comes out after most of the housing
data has already been released; its influence is therefore
diminished. The indicator sometimes shocks the market if it
shows a sudden pick-up in the amount spent on new home construction.
Release Date: Around the beginning of each month
CONSUMER
CONFIDENCE INDEX (CCI)
The Consumer Confidence Index (CCI) is put out by The Conference
Board. (There are others such as the Michigan Sentiment Index,
which is put out monthly by the University of Michigan). The
Consumer Confidence Survey is based on a sample of 5,000 U.S.
Households and is considered one of the most accurate indicators
of confidence. It even goes as far as calculating the number
of "help wanted" ads in newspapers to detect how
tight the job market are.
The
idea behind consumer confidence is that when the economy warrants
more jobs, increased wages, and lower interest rates, it increases
our confidence and spending power. Should the index move above
or below the moving average it is a good indication that consumer
confidence is significant. Month to month changes are not
considered to have as great an impact as the overall trend.
Confidence
is looked at closely by the Federal Reserve when determining
interest rates, which affect stock prices. Lowering interest
rates make it easier to borrow which ultimately supports consumer
spending and higher confidence - something the stock markets
love to hear. Keep in mind that lowering interest rates is
not an instantaneous confidence booster, it can take 6-8 months
for rate cuts to work their way into the economy. On the other
hand, if confidence is rising rapidly it could trigger higher
inflation.
Release Date: Around the 25th of each month
CONSUMER
CREDIT
Consumer Credit is an indicator of consumer spending and demand.
It reflects the amount of credit Americans are using, month-on-month,
through credit card purchases, personal loans, hire purchase
orders or payment plans. A high consumer credit figure suggests
the US consumer is not concerned to run up bills in order
to finance his/her consumer demands. But the figure is often
revised and is seasonally volatile – it goes up before
Christmas. It is therefore given only cursory attention.
Release Date: Around 7th of each month
CONSUMER
PRICE INDEX (CPI)
The Consumer Price Index (CPI) is considered the most widely
used measure of inflation and is regarded as an indicator
of the effectiveness of government policy. The CPI is a basket
of consumer goods (and services) tracked from month to month
(excluding taxes). Items included reflect prices of food,
clothing, shelter, fuels, transportation, health care and
all other goods and services that people buy for day-to-day
living. CPI figures are collected in 87 areas throughout the
U.S. from over 22,000 retail and service establishments. Rent
paid by individuals is also collected from 50,000 landlords
and tenants.
The
CPI is one of the most followed economic indicators and considered
to be a big market mover. A rising CPI indicates inflation,
a large increase is something financial markets don't like
to hear. Inflation is the rate at which the general price
for goods and services is rising, and subsequently our purchasing
power is falling. As inflation rises, this means that every
dollar you own will buy a less percentage of a good or service.
The Federal Reserve typically battles rising inflation by
increasing short term interest rates. Rising rates are frowned
upon by corporations and investors because the cost of borrowing
money increases.
Release Date: Second Friday of each month
CURRENT
ACCOUNT
The most important part of international trade data. It is
the broadest measure of sales and purchases of goods, services,
interest payments and unilateral transfers. The entire merchandise
trade balance is contained in the current account.
DURABLE
GOODS ORDERS
These include large ticket items such as capital goods (machinery,
plant and equipment), transportation and defence orders. They
are extremely important in that they anticipate changes in
production and thus, signal turns in the economic cycle. Nevertheless,
the large size of these items (aircrafts and civilian orders)
means that they present equally large changes, which makes
them extremely volatile. This also gives rise to sizeable
revisions in the subsequent periods once more complete data
becomes available one week later. Durable goods data are better
used when omitting defence orders and transportation orders,
while calculating a three-month moving average, and a year-to-year
percent change.
Release Date: Around the 26th of each month
EMPLOYMENT
COST INDEX (ECI)
The Employment Cost Index is a quarterly survey of employer
payrolls in the final month of the quarter. The ECI tracks
movement in the cost of labour that includes wages, fringe
benefits, and bonuses for employees at all levels of involvement
in the companies. Wages and salaries make up approximately
75% of the index value. The one benefit not included in the
ECI is employee stock options, which actually do not cost
employers anything to issue.
This
indicator isn't the most watched, but it is among a select
group of indicators that have enough power to move the markets,
especially during inflationary times. The idea behind the
ECI is that as wage pressures increase so does inflation.
This is mainly because compensation tends to increase before
companies increase prices for consumers (inflation).
The
ECI is particularly useful when it's compared to inflation
and productivity growth rates. Ideally, you would like to
see wages increase at a similar rate as inflation and productivity.
If employee costs are rising but productivity is not then
it could spell trouble for companies.
Release Date: The last Thursday of Apr, Jul, Nov and Jan
EUROPEAN
CENTRAL BANK (ECB)
The European Central Bank (ECB) and the national central banks
together constitute the Eurosystem, the central banking system
of the euro area. The main objective of the Eurosystem is
to maintain price stability: safeguarding the value of the
euro.
Release Date: First Thursday of each month
EXISTING
HOME SALES
The number and value of old homes sold. Can give markets an
insight into the strength of consumer confidence and spending
power. Existing home sales also offer evidence of inflationary
pressure if prices are rising rapidly.
Release Date: Around the 25th of each month
FACTORY
ORDERS AND MANUFACTURING INVENTORIES
In many respects this report is a rehash of the durable goods
release that became available a week earlier. However, the
factory orders report merits review because it also contains
data on orders and shipments of nondurable goods, manufacturing
inventories, and the inventory/sales ratio. Order data is
useful because it tells us something about the likely pace
of production in the months ahead. They are extremely volatile
and can fluctuate by three or four percent in any given month.
They are subject to sizeable revisions and are very difficult
to forecast.
Release Date: Around the 4th of each month
FEDERAL
OPEN MARKET COMMITTEE (FOMC)
The body that sets the interest rates and credit policies
of the Federal Reserve System. The FOMC is the most important
monetary policymaking body of the Federal Reserve System.
The
FOMC is composed of the seven members of the Board of Governors
and five Reserve Bank presidents. The president of the Federal
Reserve Bank of New York serves on a continuous basis, while
the presidents of the other Reserve Banks serve one-year terms
on a rotating basis.
Release Date: First Wednesday of the month
GROSS
DOMESTIC PRODUCT (GDP)
GDP is a gross measure of market activity. It represents the
monetary value of all the goods and services produced by an
economy over a specified period. This includes consumption,
government purchases, investments, and the trade balance (exports
minus imports). The GDP is perhaps the greatest indicator
of the economic health of a country. It is usually measured
on a yearly basis, but quarterly stats are also released.
The Commerce Department releases an "advance report"
on the last day of each quarter. Within a month it follows
up with the "preliminary report" and then the "final
report" is released another month later.
The
most recent GDP figures have a relatively high importance
to the markets. GDP indicates the pace at which a country's
economy is growing (or shrinking). If GDP growth fails to
meet or beat the market expectations stocks can temporarily
pay the price. Traditionally, the U.S. Economy's average growth
rate has been between 2.5 - 3%. Economists believe that this
range represents the sustainable long-run growth rate of output.
Release Date: Last day of the Quarter
HELP
WANTED INDEX
An index published monthly by the Conference Board that shows
the total number of help-wanted advertisements occurring monthly
in 51 major newspapers from around the country.
This
is an indicator of strength in the labour markets. Large numbers
of ads imply that the labour market is strong and wages will
need to increase in order to attract more workers. In contrast,
if the number of ads are few, the labour market is weak and
wages will decrease as workers will be willing to accept lower
wages for jobs.
Release Date: Last Thursday of each month
HOUSING
STARTS / BUILDING PERMITS
This economic indicator tracks how many new single-family
homes or buildings were constructed throughout the month.
For the survey each house and each single apartment are counted
as one housing start, (a building with 200 apartments would
be counted as 200 housing starts). The figures include all
private and publicly owned units, with the only exception
being mobile homes, which are not counted. Most of the housing
start data is collected through applications and permits for
building homes. The housing start data is offered in an unadjusted
and a seasonally adjusted format.
This
indicator is not a huge market mover, but it has been reported
by U.S. Census that the housing industry represents over 25%
of investment dollars and a 5% value of the overall economy.
Housing starts are considered to be a leading indicator, meaning
it detects trends in the economy looking forward.
Declining
housing starts show a slowing economy, while increases in
housing activity can pull an economy out of a downturn. However,
a considerably stronger report is not good because it can
be interpreted that growth is extremely strong and could lead
to high inflation. The fact that housing is closely related
to mortgage rates means that housing starts data has a strong
effect on the bond market and predictions for interest rate
movements. As interest rates rise it is expected that housing
starts will decline.
Release Date: Around the middle of the following month.
IFO
Germany’s leading survey of business conditions. Published
monthly by the Institute for Economic Research, one of the
largest economic think tanks in Germany, the IFO Business
Climate Index is a widely followed leading indicator of economic
activity known for its track record in calling economic turns
in German economic growth. The index surveys over 7,000 enterprises
on their assessment of the current business situation and
their resulting plans for the short-term. In addition to this
aforementioned headline index, there is the Current Situation
Index and Business Expectations Index.
Release Date: Around the end of each month
INDEX
OF INDUSTRIAL PRODUCTION
This is an important measure of the nation's industrial output.
It is expressed as a rate of change from the previous month,
and gives markets a good idea of the strength of the US manufacturing
sector. The index comprises data from the market and from
industrial sectors. The market grouping consists of final
products (consumer goods, business equipment, and construction
supplies), intermediate products and materials. The industrial
grouping covers manufacturing (divided into durable and non-durable
goods), mining and utilities. Changes in industrial production
are a significant indicator of manufacturing sector trends.
However, from month to month the figures can be volatile.
With this in mind, it is better to follow either the three-month
moving average of the monthly change or year-on-year changes.
Release Date: The second Friday of each month
INITIAL
CLAIMS (JOBLESS CLAIMS)
The numbers are released each week by the US Department of
Labour and measure the weekly change in state applications
for unemployment benefits. The financial markets regard the
report as a good indicator of changing trends in the labour
market and in the economy as a whole.
However,
the figures do not always represent a true picture of economic
trends. They are often distorted by short-term factors such
as state and federal holidays. Therefore, a longer-term moving
average of initial claims is a more reliable indicator. Initial
claims also give hints about the non-farm payroll. If initial
claims are down consistently over a month, there is a good
chance the non-farm payroll will come in high.
Release Date: Every Thursday
INSTITUTE
FOR SUPPLY MANAGEMENT (ISM)
This is leading survey on US manufacturing activity. The report
is released on the first working day of the month, providing
the first detailed look at the manufacturing sector before
the release of the all-important employment report.
Highly
valued for its timeliness and breadth of information, the
headline figure is a function of six major components: prices
paid; new orders; supplier deliveries; production, inventories
and employment. Note that the latter three components reflect
supply forces, while the former three cover demand forces.
Watching the relative trend of these two groups (demand and
supply) sheds light on the balance between demand and supply
forces, and hence, provides insight on the Federal Reserve’s
policy decisions since they lend much importance to these
balances. The Prices Paid component is widely watched because
it assesses price pressures ahead in the sector. A figure
of 50 or above indicates expansion in the sector, while a
number below 50 suggest a contraction.
Release Date: First Thursday of the month
LEADING
INDICATOR
The leading indicator piles together already-announced data
for new orders, jobless claims, money supply, average workweek,
building permits, stock prices and durable goods. Its predictability
gives it a low grade.
Release Date: Beginning of the month
MICHIGAN
CONSUMER SENTIMENT
The Michigan consumer sentiment index is a survey of consumer
confidence conducted by the University of Michigan at a national
level. There are two reports a month: a preliminary released
around the 10th of the month for that month, and a final released
on the first of the next month for the prior month. The index
is nothing more than a snapshot of whether consumers feel
like spending their money or not.
Release Date: The second Friday of each month
MONETARY
POLICY COMMITTEE (MPC)
Interest rates are set by the Monetary Policy Committee.
The
MPC studies all the available economic data and looks at a
range of domestic and international economic and monetary
factors. There is a briefing meeting prior to the MPC where
presentations are made to the MPC by the Bank's economists
and its regional agents.
The Bank's Monetary Policy Committee (MPC) is made up of the
Governor, the 2 Deputy Governors, the Bank's Chief Economist,
the Executive Director for Market Operations and 4 external
members appointed directly by the Chancellor.
Release Date: Wednesday / Thursday at the beginning of the
month
MONEY
SUPPLY
The entire quantity of a country's bills coins, loans, credit,
and other liquid instruments in the economy.
Money
supply is divided into three categories, M1, M2, and M3, according
to the type and size of account the instrument is kept in.
This number is important to economists trying to understand
how policies will affect interest rates and growth.
Release Date: Around the beginning of each month
NEW
HOME SALES
Monthly data new home sales data are released for the nation
as a whole and for four geographical areas – the Northeast,
the Midwest, the South, and the West. The report also contains
information on home prices, and number of houses for sale.
Housing is a crucial segment of the economy because it signals
changes in consumer spending patterns that are indicative
of economic activity. Volatility and revisions, however, are
common in the report. The report is seasonally variable. A
four-month moving average or a year-on-year measure is more
useful.
Release Date: Around the 26th of each month
NON-FARM
PAYROLL (NFP)
Non-farm payroll (NFP) is a monthly survey of the number of
new jobs created. It is a very good indicator of the unemployment
rate. NFP is the market mover, the most closely-watched by
all in the bond and foreign exchange markets. NFP is also
seen as having a reasonable correlation with GDP growth. There
is a rule of thumb that a rise of 200,000 a month equates
to a rise of 3% in GDP.
Release Date: First Friday of each month
PERSONAL
CONSUMPTION
Personal consumption is an indication of the amount Americans
spend on goods and services in a given month. The number is
pre-empted by retail sales, which tend to give a more thorough
view of similar expenditure.
Release Date: Around the end of each month
PERSONAL
INCOME AND PERSONAL CONSUMPTION EXPENDITURES (PCE)
Personal Spending, also known as PCE, represents the change
in the market value of all goods and services purchased by
individuals. It is the largest component of GDP. Personal
income represents the change in compensation that individuals
receive from all sources including: wages and salaries; proprietors’
income; income from rents; dividends and interest; and transfer
payments (Social Security, unemployment, and welfare benefits).
The release of these two figures gives you the savings rate,
which is the difference between disposable income (personal
income minus taxes) and consumption, divided by disposable
income. The ever-declining savings rate has become a key indicator
to watch as it signals consumer spending patterns.
Release Date: Around the end of each month
PHILADELPHIA
FED INDEX (BUSINESS OUTLOOK SURVEY)
The Philadelphia Fed Index is a monthly survey of manufacturers
located around the states of Pennsylvania, New Jersey and
Delaware. Companies surveyed indicate the direction of change
in their overall business activity and in the various measures
of activity at their plants. They are asked questions regarding
employment, working hours, new and unfilled orders, shipments
inventories, delivery times, prices paid, and prices received.
The survey has been conducted each month since May 1968. The
index signals expansion when it is above zero and contraction
when below. It takes the difference between the number of
positive and negative responses: if 30% of manufacturers think
prices will go up and 39% think they will go down, the prices
paid indicator would be –9.
The
Philadelphia Fed Index is considered to be a good indicator
of changes in everything from employment, general prices,
and conditions within the manufacturing industry. Manufacturing
is considered to be a precursor to future economic conditions
and it lays the groundwork toward economic recovery. For example,
in a poor economy if manufacturing starts to pick up there
is an expectation that the economy will soon follow behind.
Release Date: Around the 17th of each month
PRODUCER
PRICE INDEX (PPI)
The Producer Price Index is not as widely used as the CPI,
but it is still considered to be a good indicator of inflation.
Formerly known as the "Wholesale Price Index", the
PPI is a basket of various indexes covering a wide range of
areas affecting domestic producers. The PPI includes industries
such as goods manufacturing, fishing, agriculture, and other
commodities. Each month approximately 100,000 prices are collected
from 30,000 production and manufacturing firms.
There
are three primary areas that make up the PPI. These are industry-based,
commodity-based, stage-of-processing goods. The PPI is another
important indicator which investors pay close attention to.
It is not as strong as the CPI in detecting inflation, but
because it includes goods being produced, it is often a forecast
of future CPI releases.
The
PPI is also used extensively by company officials for determining
future supply or sales contracts. For example, a sudden rise
in the PPI could mean that future sales contracts will also
rise.
Release Date: Second Thursday of the month
PRODUCTIVITY
An indication of output per employee. While productivity is
helpful in the analysis of an economy, it is often misleading.
This is because a reduction in personnel can, at times of
recession for example, lead to an increase in productivity.
Thus, output per employee may seem encouraging while overall
economic performance is declining.
PURCHASING
MANAGERS INDEX (PMI)
The Index is widely used by industrialised economies to assess
business confidence. Germany, Japan and the UK use PMI surveys
for both manufacturing and services industries. The numbers
are arrived at through a series of questions regarding Business
activity, New Business, Employment, Input Prices, Prices Charged
and Business Expectations. In addition to the headline figures,
the prices paid components is highly scrutinized by the markets
for evaluating pricing power and inflationary risks. Also
see National Association of Purchasing Managers (NAPM). A
PMI index over 50 indicates that manufacturing is expanding
while anything below 50 means that the industry is contracting.
The
PMI report is an extremely important indicator for the financial
markets as it is the best indicator of factory production.
The index is popular for detecting inflationary pressure as
well as manufacturing economic activity, both of which investors
pay close attention to. The PMI is not as strong as the CPI
in detecting inflation, but because the data is released one
day after the month it is very timely.
Should
the PMI report an unexpected change, it is usually followed
by a quick reaction in stocks. One especially key area of
the report is growth in new orders, which predicts manufacturing
activity in future months.
Release Date: The first business day of the month
RETAIL
SALES
Measures the percentage monthly change in total receipts of
retail stores, and includes both durable and non-durable goods.
It is the first real indication of the strength of consumer
expenditure. The limits of the retail sales figure, however,
lie in the fact that it focuses on goods while ignoring services
and other items such as insurance and legal fees. In addition,
the report is stated in nominal terms rather than real, thus,
not accounting for inflation. The retail sales figure is also
subject to sizeable revisions, even when excluding auto sales
(core retail sales). Every month the data is released showing
the percent change from the previous month data. A negative
number indicates that sales decreased from the previous month’s
sales.
This
indicator is a big market mover, especially for retail stocks.
The data is very timely because retail sales data is released
within 2 weeks of the previous month.
Release Date: Second Thursday of each month
UNEMPLOYMENT
Unemployment is a key indicator. It has a lowly rating because
there are previews to it that paint most of the picture before
the actual figures are released. Most important of the previews
are the initial claims figures, which report the numbers looking
for unemployment benefit. All the same, unemployment can still
contradict expectations and cause upsets.
Release Date: Around the 7th of each month
WHOLESALE
TRADE
The trade conducted between wholesalers and the retail sector.
Not watched particularly closely by markets, but gives an
idea of economic activity that may later filter through to
the wider economy.
Release Date: Around the 7th of each month.
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