UNDERSTANDING
FUNDAMENTAL ANALYSIS
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
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.