Macro-Economic Trading

Macro-Economic Indicator Market Trend

“Successful traders combine knowledge of the macro-economic conditions with some technical as well as fundamental analysis in order stay ahead of the game. By doing this they speculate but they do not gamble and they never buck a trend.

Some macro-economic indicators are leading indicators while others are lagging indicators. A leading indicator predicts the status of the economy in the future. In order to understand and appreciate macro-economic trends – traders should fall in love with leading indicators. They indicate changing market and sector trends.

Lagging indicators only changes direction after business conditions have changed.

A leading indicator predicts the status of the economy in the future. In order to understand and appreciate macro-economic trends – traders should fall in love with leading indicators. They indicate changing market and sector trends.

Lagging indicators only changes direction after business conditions have changed. The average duration of employment is considered a lagging indicator. Decreases in the average duration of employment occur after an expansion gains strength, while the most acute increase tend to occur after a recession has begun.

Auto and Truck Sales (A Recession Indicator)

This report is so very important because it tracks the first indicator (along with housing starts) to turn down when the economy begins to slide into a recession. When consumers begin to worry about the economy, they will be hesitant to spend money on big ticket items such as SUVs and cars.

Housing Starts and Building Permits (A Recession Indicator)

The housing industry is no doubt a leading indicator for the rest of the economy. The housing industry accounts for over a quarter of all investment spending. When housing sales slow, people do not purchase as many appliances, furniture and other accessories. Now what does this mean for the market? If inflation is a concern in the mid to late stages of an expansion, the stock market views a strong housing start report as bearish, while earlier in the cycle or in recessionary trough, good housing news is bullish.

New and Existing Home Sales (A Recession Indicator)

This report includes information on home sales, inventory levels and median home prices. The sale of new homes is very sensitive to interest rates and will react quickly. The inventory data are important because a low inventory level may signal an increase in new housing starts. The median price is a good indicator of inflation in the market.

Construction Spending (Yawn…)

The data in this report is volatile and subject to major revisions. This report is not given its due although some people will look at it for emerging trends.

Initial Jobless Claims (Recession Indicator)

Some analysts look at the data as a four week moving average because it is also volatile. This is however one of the components of the Index of Leading Indicators. New people on the unemployment line represent a very early warning that all is not well in the economy.

The Jobs Report (A Recession Indicator)

The jobs report provides crucial information on the unemployment rate, non-farm pay-rolls, average hours worked and average hourly earnings. It is so crucial to the market that some traders will clear their positions ahead of the report. It is published by the Department of Labor on the first Friday of every month for the previous month. It is possible to predict what will happen to some of the other macro-economic indicators from the jobs report. If we know how many people are working and we know how many hours they have worked and we know their cumulative overtime hours, then we can estimate how much these workers have produced. This data will show up two weeks later on industrial production. We can also gage the data for personal income from the jobs report. We can examine a specific sector such as the construction industry which in turn will help us to predict housing starts.

The jobs report is also important because it can be a driving force for swift fiscal or monetary policy change. The political aspect of this report cannot be undermined.

The Unemployment Rate (Recession Indicator)

The unemployment rate will get Wall Street’s attention only because of its political implications. Policy makers will want to lower the unemployment rate, especially in an election year. However, most traders get nervous when this unemployment rate approaches the natural rate of unemployment. When unemployment falls below this natural rate, inflationary pressures will start to build.

The rate of growth of the money supply is the driving force of both inflation and recession. Inflation happens when the government prints too much money and recession happens when it prints too little. The repeated use of activist fiscal and monetary policy to push the economy beyond its growth limits will result in stagflation. These growth limits are the referred to as the “natural rate of unemployment”

Nonfarm Payrolls (Recession Indicator)

The jobs report also contain data on nonfarm payrolls as a second measure of the level of unemployment. Problems inevitably arise when looking at the data – they stem from double-counting, labor strikes, and surges in government employment.

People sometimes work a part time job to supplement their income and they may quit when they feel they have earn enough. When labor strikes happen, this may look like a drop in employment – when in fact it isn’t. Surges in government employment such as census workers can create an impression of a rapidly growing economy.

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