Explaining the US Economic Data – Part 2

Because the Federal Reserve of the United States (Fed) is the biggest central bank in the world, and the United States economy is the number 1 economy, the role of US economic data in any fundamental analysis is crucial. Moreover, the dual mandate the Fed has makes a solid case for more data to be considered. The interest rate on the dollar is the one thing that matters the most to the Forex market. To be honest, not only the currency market is influenced, as equities are affected as well. For example, when the Fed hikes the interest rates, the one place to be from an equity point of view is in banking stocks. A higher interest rate allows for higher revenues for the banking system, and the list can go on, using other things to correlate the moves a central bank makes with the stock market. Bonds are influenced as well, not to mention the other currencies on the Forex dashboard, due to the interest rate differential that is created. In the Eurozone, the interest rates are in negative territory, -0.5%, while in the United States they are positive and rising. Currently, as this article is being written, they sit at 0.75% and are forecasted to rise to 1%; with a plus, not a minus! This interest rate differential influences flows into or out of a currency/currency pair. While it could be that for some specific period a currency pair will move in a divergent mode, in the end the interest rate differential will have the last say. In Australia, the interest rates, as set by the Reserve Bank of Australia (RBA), are currently at 1.5%. Compared with those in the United States and the Eurozone, they offer a different picture. The interest rate differential is positive for the Australian dollar against the US dollar, and positive for it against the euro as well. Between the two, the differential is bigger against the euro. In other words, if one is looking to buy the Australian dollar against something, between the two options listed above, the second one is the recommended one. It is no wonder that since mid-2015 the EUR/AUD cross has moved in a bearish manner, from approximately 1.60 to the current 1.40 level; that is from the moment the European Central Bank (ECB) started to cut rates further and faster than the RBA. The currency pair thus reflects this difference. Traders can form an educated guess about what a central bank is going to do at the next meeting, and part of this process is to look at and interpret economic data.

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The Orange Data

The orange data is still part of the second-tier data. It is important, definitely more important than the yellow data, but not as important as the crucial events represented in red in any economic calendar. Prices will move, and the US dollar will react if the orange economic data differs widely from the forecasted value. If not, it is considered to be in line with expectations. The US data allows for a detailed analysis of the American economy. Below are a couple of examples of orange data, but bear in mind that these were picked on a random basis and are not the most representative of them all.

The Core PPI m/m

This is a monthly release. While it is classed as orange data, it is important as it refers to inflation. The PPI stands for Producer Price Index, and shows the changes in the price of finished goods and services sold by producers. Not all products are considered, though, as food and energy are excluded. Food and energy have volatile prices (just think of the oil prices in the last two years or so!) and the core release needs to be more stable, as this is preferred by the Fed when it looks at inflation at the producers’ level. There is a strong correlation between the PPI and the Consumer Price Index (CPI) . The CPI is part of the Fed’s mandate, and it is known that the PPI inflation, if any, will be transmitted to consumers at the end of the day. As a result, a higher PPI print, bigger than the expected value, should be bullish for the dollar. Chances are that in time such an increase will be reflected in consumer prices as well, and the Fed will have no way out of it but to become hawkish and eventually hike the rates.
US data - orange data - 1
Coming back to the actual release, this is made publicly available around 2 weeks after the month’s end. As a rule of thumb, if the actual is bigger than the forecast, it is perceived as a bullish outcome for the currency, the US dollar in this case. The bigger the difference between these two values, the stronger the move in the dollar will be. For example, this March 2017 release is expected to come in at 0.2%, compared with the previous 0.4% print. A small decline is expected, and the market’s reaction will be muted for any print of around 0.2%–0.3%, but it should be significant for any lower values. Past data is important as well for a trend to be built.

Empire State Manufacturing Index

Still a second-tier data item, the Empire State Manufacturing Index is a survey of the New York manufacturing area. Because New York is a big manufacturing centre in the overall US manufacturing sector, changes in this index may give a clue about the shape of the US economy.
US data - orange data - 2
This indicator is interpreted based on the zero level. In a way, the interpretation is similar to the one for the PMIs at the 50 level. Above-zero values show a sector that is improving, while below zero suggests worsening conditions. The higher the value, the better for the currency. This print for March 2017 shows an expected 15.3 figure to follow the previous figure of 18.7. It shows a potential decline, but if one looks at the overall interpretation, it is still above the zero level, and shows a sector that is in expanding territory. The reason why this data is a second-tier item comes from the fact that the US economy is a service-based economy, not a manufacturing one. In a service-based economy, the Gross Domestic Product (GDP) is composed mostly of services. While manufacturing data still matters for the economy, the data tends to be overlooked if it is in line with expectations. If the services sector confirms the strength or the weakness of the manufacturing one, or, in other words, if they are moving in the same direction, the central bank will react sooner rather than later.

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