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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What Are Macroeconomic Indicators?

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In order to trade on financial markets successfully, it’s important to know which macroeconomic indicators may influence price action and any of your open, or potential, positions. Many traders tend to analyse the market calendar for the upcoming week to know when market volatility may increase and how they can manage risk. Find out what are macroeconomic indicators and which top indicators you should keep an eye on.

What Are Macroeconomic Indicators?

Macroeconomic indicators, also known as fundamental data releases, are statistics or readings that reflect the economic circumstances of a particular country, region or sector. They are used by analysts and governments to assess the current and future health of the economy and financial markets.

Macroeconomic indicators will vary in their meaning and the impact that they have on the economy, but broadly speaking there are two main types of indicators.

Types of Macroeconomic Indicators

  • Leading indicators - forecast where an economy might be heading. They are often used by governments to implement policies because they represent the first phase of a new economic cycle. They include: yield curve, interest rates and share prices.
  • Lagging indicators - reflect an economy’s historical performance and only change after a trend has been established. They are used to confirm a trend is underway. They include: gross domestic product (GDP), inflation and employment figures.

There is also the category of coincident indicators, but these are generally grouped in with lagging indicators as they either happen at the same time or after an economic shift.

Top Macroeconomic Indicators to Watch

The best macroeconomic indicator to watch will heavily depend on your personal preferences, what positions you are taking and which country your portfolio is focused on. However, there are some very common indicators that most traders and investors will keep an eye on.

The Stock Market

The stock market is considered a good predictive indicator of economic health, as market participants spend their time assessing the health of companies and the economy, so are well placed to judge future growth.

However, it’s important to keep in mind that there are several issues with relying on the stock market as an economic indicator. The main one being that the prices are often based on speculation rather than the true value of a company, which is why stock prices can be over- and under-valued. As the past has shown us, the stock market has also experienced significant bubbles ahead of market crashes, which can create a false sense of optimism about the state of the economy.

House Prices

The housing market is widely considered a leading indicator, because the information can inform the state of the economy months in advance.

A decline in housing prices suggests that the number of houses exceeds the amount of people looking to buy. This can have an impact on homeowner wealth, jobs in the construction sector and taxes, and can also force homeowners into foreclosure.

On the other hand, the number of building permits can be a leading indicator of economic health, because companies will apply for these permits at least six months before they start construction. If new projects start, this is seen as an indication that these companies expect demand for homes to rise.

Bond Yields

The best way to use bonds as an indicator is by looking at the yield curve. A bond’s yield is the income that a trader can expect to receive in return for buying and holding a bond.

When the economy is growing, a positive upturn can be expected as a result of higher inflation. When the economic future becomes uncertain, the yield curve flattens. If the yield curve becomes inverted, this can be seen as a sign that investors expect economic growth to slow sharply while inflation is low, and they, therefore, expect central banks to cut interest rates.

Retail Sales

In general, increasing retail sales is an indication that the economy is improving. If consumers are confident in their economic circumstances and the future of their situation, they will continue to buy products and fork out money on items that aren’t necessities.

On the other hand, when consumers start to feel uncertain about their economic future, they will stop buying unnecessary items and restrict their spending. During these periods, stocks of companies involved in producing consumer necessities like food and utilities will tend to outperform the market. To combat the decline in spending, governments often implement tax reductions in order to give consumers more money and boost spending.

Interest Rates

Interest rates are often classified as both a leading and a lagging indicator. They are lagging in the sense that the decision to increase or decrease rates is made by central banks after an economic event or market movement has already occurred. However, they are also leading because once the decision has been made, there is a significant likelihood of the economy changing to reflect the new rate.

GDP Growth Rates

Gross domestic product (GDP) is the monetary value of all goods and services produced in a country. The data is widely used to compare the differences between economies and forecast their growth.

When GDP increases, it can have a knock-on effect on other indicators on this list, such as employment rates, as companies take on more employees and increase their production. If a country has a consistent GDP growth rate, this is a good sign that the economy is stable. On the other hand, if GDP starts to decline, this is often seen as a sign of a failing economy.

Currency Strength and Stability

A country’s currency is a reflection of the health and stability of its economy because a currency’s price is based on how buyers and sellers around the world perceive its value.

When there is significant uncertainty or change, the instability plays out across the nation’s currency and the value can change rapidly. This is known as market volatility. A strong economy is viewed positively by investors, who will pay more for the currency. In turn, a strong currency boosts the economy, due to its increased purchasing power. On the other hand, a weak economy discourages investment, which causes the currency to decline in value. This then lowers the price of exports, which can make prices more competitive on a global stage.

Labour Market Statistics or Unemployment Rate

If the unemployment rate increases month-on-month over a period of time, it tends to indicate that the overall economy has been declining in health. When employment rates fall, it means that businesses have finally given up hope that the situation will improve and have started to lay off their workers, which is the ultimate sign of an economy in trouble.

Commodity Prices

An economy-wide increase in demand for certain commodities, such as wood, iron and oil, can be seen as a sign that an economy is growing. When demand for these commodities decreases, this is usually a symptom that an economy is contracting and building projects are ceasing.

However, certain commodities, such as gold, will increase in price during economic downturns. Gold is considered a safe-haven asset, so investors consider it a store of value during periods of economic uncertainty. If the price of gold rises, it can be a sign that the economy is slowing, and investors are seeking out more stability.

XTB’s Economic Calendar

The economic calendar is built-in to our trading platform, xStation.

Economic Calendar

Source: xStation

In our calendar, you can find the most important macroeconomic readings for the upcoming weeks, together with their potential impact rating. The red exclamation marks identify the most important readings, while the orange exclamation marks indicate the readings with average significance. Finally, the white indicates that the release is anticipated to have little or no impact on the markets.

Some of the most important macroeconomic indicators you can find on XTB’s economic calendar include:

  • Non-Farm Payrolls (NFPs)
  • Consumer Price Index (CPI)
  • Decisions on interest rates
  • Retail Sales
  • Industrial Production
  • Gross Domestic Product (GDP)

As a general rule, you should take into consideration that changing market conditions can affect the significance of a macroeconomic indicator. A good example of this would be the US crisis in 2007, where the housing sector’s collapse led to analysts focusing on indicators related to the real estate market, such as new home sales, existing home sales, and housing starts.

Key Takeaways

  • Macroeconomic indicators, also known as fundamental data releases, are statistics or readings that reflect the production or output of an economy, government, or sector.
  • Macroeconomic indicators vary in frequency, impact, and meaning.
  • They include things like: interest rates announcements, GDP, consumer price index, employment indicators, retail sales, monetary policy, and more.
  • Macroeconomic indicators may cause increased volatility in the financial markets.
  • Generally speaking, the bigger the difference between market consensus and actual readings, the higher the reaction or volatility.
  • You can stay up to date with all data releases with XTB’s economic calendar, which also gives you the potential impact of each indicator.

In order to trade on financial markets successfully, it’s important to know which macroeconomic indicators may influence price action and any of your open, or potential, positions. Many traders tend to analyse the market calendar for the upcoming week to know when market volatility may increase and how they can manage risk.

FAQ

Some of the most important macroeconomic indicators include:

  • Non-Farm Payrolls (NFPs)
  • Consumer Price Index (CPI)
  • Decisions on interest rates
  • Retail Sales
  • Industrial Production.
  • Gross Domestic Product (GDP)

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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