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What economic data actually means, and what really matters to investors

Historical information may have limited value, but its ability to assist investment managers in identifying trends cannot be understated. Of course, understanding (let alone pulling apart) economic data is not always straightforward.

Day in, day out, investors see it – market falls or rises, blamed on economic data. And when you think of the seemingly endless array of economic figures that are released on a regular basis, it makes the share (and bond) markets a minefield of pretexts for moves, that only make sense with hindsight.

This is particularly the case for the share market, in which people think they are investing in companies, or in vehicles based on indices that will compound the returns from the successful companies that survive long-term. Share market investors know that in the long term, the only thing that drives equity returns is the earnings of companies.

But the share market is always looking for things that may influence this; and earnings are generated within an economy; so, the health of the relevant economy is important. And that’s what economic data either tells an investor, or predicts.

  • Also, there is that mysterious and intangible driver of the sharemarket on a day-to-day basis – sentiment, or how the market feels collectively in its eternal oscillation on the emotional spectrum bookended by fear and greed. Economic data releases can move the sentiment needle quickly and sharply.

    A bewildering array of economic statistics – known as ‘prints’ in the trade – is published each week, and not all of those statistics are easily understood. But plenty of these pieces of economic data can move the market substantially, by pointing to the likely trajectory of interest rates.

    Usually, market reaction to any piece of economic data depends more on how the announced figure relates to what the market expected, rather than the actual figure.

    Here are some of the heavyweights of the economic data world:

    • Gross domestic product (GDP): The monetary value of all goods and services produced in a discrete economy; this figure shows the rate at which the economy is growing. This could be too high a rate for a central bank, because it might indicate that inflation (see below) is running ‘too hot,’ and could need an interest-rate rise to bring it under control. In our world, Australian GDP is important, but so are the equivalent figures for the US, because the Federal Reserve effectively sets the basis for global interest rates; and China, whose voracious demand for Australian commodities has underpinned our economy and share market for many years. 
    • The inflation rate: this figure, the change in the consumer price index (CPI) has elbowed its way to the forefront in recent years, as it is perceived to show the major target of central banks’ interest rate policies. In both Australia and the US, the central banks have lifted rates in a bid to dampen inflation.
    • The US non-farm payrolls (NFP) figure, which is published on the first Friday every month, by the US Bureau of Labor Statistics: this report reveals change in the number of employed people in the US from the previous month, excluding people working at the basic level of the agricultural sector (that means it covers about 80 per cent of the US work force). This figure also has implications for interest rates; likewise in our market for Australian jobs data.
    • Purchasing managers’ indices (PMIs): this is an economic indicator derived from surveys completed by managers from a range of differently sized companies, within a chosen sector, regarding their intentions to order quantities of the inputs those businesses require to make their products or services. The PMIs are thus regarded as a helpful predictor of economic activity. There are different PMIs published for manufacturing and for services, but the common factor is that the index is out of 50, and a figure above 50 indicates expansion, while a figure below 50 points to contraction. The Australian market looks particularly closely at the PMIs for China: here there is a twist that the official China Manufacturing and Services PMIs come from the country’s National Bureau of Statistics (NBS), while the unofficial China PMIs are published by Chinese media group Caixin, and compiled by international information and data analytics provider IHS Markit. The official PMI survey typically polls a large proportion of big businesses and state-owned enterprises, while the Caixin indicator is considered a more accurate gauge of China’s privately-run medium- and small-sized manufacturers and exporters. For this reason the Caixin figures are more influential than the official numbers.

    All of these have been blamed for sharemarket falls, and credited for sharemarket rises, on any given day.

    But whereas traders should obviously be alert for when these figures are coming out, and in what direction economists and strategists seem to agree an individual figure will move, should investors and advisers worry about them at all?

    “For investors, being aware of global macroeconomic data is really important – but only to the extent that it helps guide an investment decision and sustainably adds value to the portfolio,” says Luke Laretive, CEO and investment adviser at Melbourne-based Seneca Financial Solutions.

    Investment decisions based solely on accurately forecasting inflation, GDP or other leading indicators, can significantly add value when advisers get them correct, says Laretive, however, investors need to consider if these positive outcomes are a function of disciplined process and skill – their own, or their advisers’ – or simply good fortune.  

    “Like all data points, there’s limited value in ‘knowing’ historical information. Most of the incremental investment value is derived from being consistently able to identify trends, quantify the likely impact of those trends on specific assets and then most importantly, act, in a timely and risk-managed way to capitalise on your edge,” Laretive says.

    James Dunn

    James is an experienced senior journalist and host of The Inside Network's industry events.

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