Definition

A composite diffusion index of national manufacturing conditions. This survey is less well known than the ISM, but can also indicate trends in production. An index level of 50 means no growth, but every 10 points signals gains of 4% in manufacturing.

Why is it important for forex traders?

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less robust growth and is extremely sensitive to whether the economy is growing too quickly, which could set the stage for inflation.

The APICS survey gives a detailed look at the manufacturing sector. The diffusion index does not move in tandem with the ISM index every month, but sometimes the two do move in the same direction. Since manufacturing is a major sector of the economy, investors can get a feel for the general economic backdrop for various investments.

• APICS Survey
• Bank Reserve Settlement 
• Chain Stores Sales
• Constraction spending 
• CPI (Consumer Price Index)
• Current Account
• Durable Good Orders
• Existing Home Sales
• Factory Orders
• HICP (Harmonised Index of Consumer Prices)
• Housing Starts
• IFO Business Climate In Industry And Trade
• International Trade
• Industrial Production and Capacity Utilization
• ISM (Institute for Supply Management)
• Jobless Claims
• Leading Indicators
• Money Supply
• New Home Sales
• Nonfarm Payroll
• Personal Income
• Philadelphia Fed Survey
• PPI (Producer Price Index)
• Retail Sales
• RPI (Retail Prices Index)
• Unemployment Rate
• ZEW

Definition

A two-week period that ends every other Wednesday during which commercial banks must meet reserve requirements stipulated by the Federal Reserve.

Why is it important?

This is primarily of interest to institutional investors and securities brokers who deal with extremely short-term financing (borrowing or lending) to meet cash management needs. For example, short term rates such as the overnight lending rate might be pressured upward by heavy demand for funds in the final few days of the Bank Reserve Settlement period.

Definition

Monthly sales volumes from department, chain, discount, and apparel stores. Sales are reported by the individual retailers. Chain store sales are an indicator of retail sales and consumer spending trends.

Why is it important?

The pattern of consumption spending is one of the foremost influences on stock and bond markets. Strong economic growth translates into healthy corporate profits and higher stock prices. The focus in the bond market is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth which is what happened through much of the nineties. As a result, investors in the stock and bond markets have enjoyed huge gains. If and when the party comes to an end, more than likely a change in the economic trend will tip us off.

Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed. Needless to say, that’s a big advantage for investors.

Chain store sales not only give you a sense of the big picture, but also the trends among individual retailers and different store categories. Perhaps the discount chains such as Target and K-mart are doing well, but the high-end department stores are lagging. Maybe apparel specialty retailers are showing exceptional growth. These trends from the monthly chain store data can help you spot specific investment opportunities, without having to wait for the quarterly or annual reports.

Just a few words of caution. Sales are reported as a change from the same month, a year ago. It is important to know how strong sales actually were a year ago to make sense of this year’s sales. In addition, sales are usually reported for “comparable stores” in case of company mergers.

Definition

The dollar value of new construction activity on residential, non-residential, and public projects. Data are available in nominal and real (inflation-adjusted) dollars.

Why is it important?

Since the economic backdrop is the most pervasive influence on financial markets, construction spending has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders and large-scale construction contractors. Commodity prices such as lumber are also very sensitive to housing industry trends.

Businesses only put money into the construction of new factories or offices when they are confident that demand is strong enough to justify the expansion. The same goes for individuals making the investment in a home. That’s why construction spending is a good indicator of the economy’s momentum.
Chain store sales not only give you a sense of the big picture, but also the trends among individual retailers and different store categories. Perhaps the discount chains such as Target and K-mart are doing well, but the high-end department stores are lagging. Maybe apparel specialty retailers are showing exceptional growth. These trends from the monthly chain store data can help you spot specific investment opportunities, without having to wait for the quarterly or annual reports.

Just a few words of caution. Sales are reported as a change from the same month, a year ago. It is important to know how strong sales actually were a year ago to make sense of this year’s sales. In addition, sales are usually reported for “comparable stores” in case of company mergers.

Definition

The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

Why is it important?

The consumer price index is the most widely followed indicator of inflation in the United States. Just knowing what inflation is and how it influences the markets can put an individual investor head and shoulders above the crowd.

Inflation is a general increase in the price of goods and services. The relationship between INFLATION and INTEREST RATES is the key to understanding how data like the CPI influence the markets ( and your investments.)

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation, because you know that the $100 won’t be able to buy the same amount of goods and services a year from now, as it does today. If you were in Brazil where prices can double every couple of months, you might want to charge 400% interest for a total payoff of $500 at the end of the year. In the United States, the CPI tells us that prices are rising about 2% a year, so you only have to charge 2% interest to recoup your purchasing power at the end of the year. You might want to add in a few more percentage points for default risk and the opportunity cost, but the key variable in what interest rate you charge is the rate of inflation.

That basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bonds and T-bills. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.

Definition A measure of the country’s international trade balance in goods, services, and unilateral transfers. The level of the current account, as well as trends in exports and imports, are followed as indicators of trends in foreign trade. Why is it important? U.S. trade with foreign countries hold important clues to economic trends here and abroad. The data can directly impact all the financial markets, but especially the foreign exchange value of the dollar. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States since this trade imbalance creates greater demand for foreign currencies. The bond market is sensitive to the risk of importing inflation or deflation. Ever since Asian economies collapsed at the end of 1997, financial market participants have feared that deflation in these economies would be transported to the United States. The linkage is not so direct, and deflationary pressures are not so likely at this time.

Definition Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Why is it important? Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market doesn’t mind growth but is extremely sensitive to whether the economy is growing too quickly and paving the road for inflation. By tracking economic data like durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provides insight to demand for things like refrigerators and cars, but also business investment going forward. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods sets the stage for greater productive capacity in the country and reduces the prospects for inflation. That tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.

Definition The number of previously constructed homes with a closed sale during the month. Existing homes (also known as home resales) are a larger share of the market than new homes and indicate housing market trends. Why is it important? This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as home resales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio. Even though home resales don’t always create new output, once the home is sold, it generates revenues for the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. The economic “ripple effect” can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Definition The dollar level of new orders for manufacturing durable and nondurable goods. It gives more complete information than durable goods orders which is reported one or two weeks earlier in the month. Why is it important? Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which is less likely to cause inflationary pressures. By tracking economic data like factory orders, investors will know what the economic backdrop is for these markets and their portfolios. The orders data show how busy factories will be in coming months as manufacturers work to fill those orders. This report provides insight to the demand for not only hard goods such as refrigerators and cars, but nondurables such as cigarettes and apparel. In addition to new orders, analysts monitor unfilled orders, an indicator of the backlog in production. Shipments reveal current sales. Inventories give a handle on the strength of current and future production. All in all, this report tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.

What is the harmonised index of consumer prices?

The harmonised index of consumer prices (HICP) is an internationally comparable measure of inflation calculated by each Member State of the European Union. HICPs are used to compare inflation rates across the European Union. Since January 1999, they have been used by the European Central Bank as the target measure of inflation for the Member States of the Eurozone. Increasingly, HICPs are being used for indexing contracts which cover more than one EU Member State.

Why were they developed?

National consumer price indices within Europe, such as the RPI, vary considerably in terms of their coverage of goods and services and in the rules underlying their construction. This can impact on the measured rates of inflation. In response to this, and as a requirement of the Maastricht Treaty, Eurostat – the statistical office of the European Union – in conjunction with the National Statistical Offices of EU Member States, developed the HICP as a comparable measure of inflation. HICP inflation rates for all Member States are available from January 1997.

How is the HICP different from the RPI?

Although, the same price data are used for both HICP and RPI and the methodologies used are similar, the rules underlying the construction of the HICP are specified in a series of European Regulations and it differs from the RPI in the following ways:

In the HICP, the geometric mean is used to aggregate the prices at the most basic level whereas the RPI uses arithmetic means.

A number of RPI series are excluded from the HICP, most particularly, those mainly relating to owner occupiers’ housing costs (eg mortgage interest payments, house depreciation, council tax and buildings insurance).

The coverage of the HICP indices is based on the international classification system, COICOP which differs from the RPI groupings.

The HICP includes series for air fares, university accommodation fees, foreign students’ university tuition fees, unit trust and stockbrokers charges, none of which are included in the RPI.

The index for new cars in the RPI is imputed from movements in second hand car prices, whereas the HICP uses a quality adjusted index based on published prices of new cars.

The HICP weights are based on expenditure by all private households, foreign visitors to the UK and residents of institutional households. In the RPI, weights are based on expenditure by private households only, excluding the highest income households, institutional households and pensioner households mainly dependent on state benefits.

In the construction of the RPI weights, expenditure on insurance is assigned to the relevant insurance heading. For the HICP weights, the amount paid out in insurance claims is distributed amongst the COICOP headings according to the nature of the claims expenditure with the residual (ie the service charge) being allocated to the relevant insurance heading.

Definition

Housing starts measure the number of residential units on which construction is begun each month.

Why is it important?

Two words…Ripple Effect. This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as housing starts, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Home builders don’t start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture, and landscaping are just a few things new home buyers might spend money on, so the economic “ripple effect” can be substantial especially when you think of it in terms of a hundred thousand new households around the country doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing starts have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the housing starts data carry valuable clues for the stocks of home builders, mortgage lenders, and home furnishings companies. Commodity prices such as lumber are also very sensitive to housing industry trends

The IFO Business Climate Index is a widely observed early indicator for economic development in Germany. Every month the IFO Institute surveys more than 7,000 enterprises in west and east Germany on their appraisals of the business situation (’good’ / ’satisfactory’ / ‘poor’) and their expectations for the next six months (’better’ / ’same’ / ‘worse’). The replies are weighted according to the importance of the industry and aggregated. The percentage shares of the positive and negative responses to both questions are balanced, and a geometric mean is formed from the balances, divided according to east and west Germany. The series of balances thus derived are linked to a base year (currently 1991) and seasonally adjusted.

In addition to the index values, the IFO Institute also published the original balances of the IFO Business Climate. The IFO Business Climate balances can fluctuate between extreme values of -100 (i.e., all responding firms appraise their situation as poor or expect business to become worse) and +100 (i.e., all responding firms assessed their situation as good or expect an improvement in their business). In actual fact, the balances fluctuate around the zero value, the fluctuations being considerably smaller (even the negative ones) than the index values, which start from a base of 100.

An example to illustrate how the balance values are calculated:

Of 100 responding firms, 40% appraise their business situation as satisfactory, 35% as good and 25% as poor. The firms that assessed their situation as satisfactory are considered to be “neutral” and do not affect the results of the business-situation appraisal. The two remaining percentage values (35 – 25) are now balanced. The resulting value of 10 is the business-situation appraisal, i.e. the first component of the business climate in the form of a balance. The six-month expectations are calculated the same way. When this value has been determined, the geometric mean is formed from the situation and expectations appraisal. This geometric mean is the IFO Business Climate balance for the individual month.

Definition

The prices of goods that are bought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products.

Why is it important?

Changes in import and export prices are a valuable gauge of inflation here and abroad. Furthermore, the data can directly impact the financial markets such as bonds and the dollar. The bond market is especially sensitive to the risk of importing inflation because it erodes the value of the principal (the original investment) which is paid back when the bond matures. It also decreases the value of the steady stream of interest rate payments on this type of security.

Inflation leads to higher interest rates and that’s bad news for stocks, as well. By monitoring inflation gauges such as import prices, investors can keep an eye on this menace to their portfolio.

Definition

The Index of Industrial Production is a chain-weight measure of the physical output of the nation’s factories, mines and utilities. The capacity utilization rate reflects the usage of available resources.

Why is it important?

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won’t lead to inflationary pressures. By tracking economic data like industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

Industrial production shows how much factories, mines and utilities are producing. Since the manufacturing sector accounts for one-quarter of the economy, this report has a big influence on market behavior. The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85%) it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to this report.

Definition International Trade measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade. Why is it important? Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. Furthermore, the data can directly impact all the financial markets, but especially the foreign exchange value of the dollar. Imports indicate demand for foreign goods and services here in the U.S. Exports show the demand for U.S. goods in overseas countries. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of U.S. trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.