Originally published by AxiTrader
The vast majority of high-profile macroeconomic releases found on the economic calendar are constrained by one simple fact. They represent events which have already happened, be that days, weeks or months ago. Some of the most influential releases for financial markets can be numbers such as the GDP prints, yet the provisional quarterly data release for the UK doesn’t come out until some 40 days after the quarter has ended.
Non-farm payrolls may look a little more timely, but this economic snapshot uses a so-called reference week in the previous month, so again the time between the measurement being taken and the data being published is typically more than three weeks. So whilst these numbers often create volatility – and with them trading opportunities – do they really hold the keys to knowing what’s going to happen in the future?
Last week we looked at some early warning signs that can help understand where US inflation may lie. This week sees the release of two key Eurozone leading indicators or forward looking numbers, so this note will explain what they are and where the accompanying trading opportunities may be.
Economic forecasters don’t possess mystic powers, so instead these forward looking views are found by undertaking extensive surveys of individuals and businesses. The next two to watch for, usually released in the third week of each month, focus on the Eurozone. The first, released on a Tuesday, is the Indicator of Economic Sentiment produced by the European economic research institution, ZEW.
As many as 300 experts from banks, insurance companies and financial departments of selected corporations are interviewed about their assessments and – most critically their forecasts - for important international financial market data every month. This study has been running for almost 30 years and provides a good insight as to the outlook for the Eurozone economy.
TRADE IDEA: Shortfalls here may suggest stimulus measures are necessary, the sort of news that could take a toll on European indices in the short term and the Euro in the longer term.
A tighter survey looking just at the German economic outlook, is published usually on the Friday of the third week of each month, in the form of the ifo Business Climate Index. This is a comprehensive, multi-sector barometer providing what is seen as the most important leading indicator for the development of the economy in Germany. Expectations are already being dialled down but again with the economic outlook becoming increasingly gloomy right across the Eurozone, a shortfall here could pave the way for a degree of panic.
TRADE IDEA: This metric used to focus on manufacturing but now includes all the key sectors of the German economy. That means a decline in this reading reflects a diminishing outlook for the nation’s economy. If the rest of the Eurozone isn’t following suite then the ECB will be less inclined to intervene, so traders may want to consider shorting the DAX and simultaneously going long on other indices within the currency bloc.
A number of other leading indicators also exist. These include metrics such as the number of new company startups, as a high number here should, by the law of averages, mean a greater number of companies pass through the growth phase to become more established players, employers and tax generators.
House prices before properties are sold can also be a good leading indicator. The Royal Institute for Chartered Surveyors (RICS) produces a monthly survey which highlights the direction property prices on those buildings “for sale” is moving. Low interest rates have left many homeowners with high levels of leverage, so the Bank of England is particularly wary over the risk of a property market crash in the UK.
Similarly, inventory levels can provide good future insight. If stockpiles at factories are rising, it could be seen as anticipation that demand is about to accelerate, but just as likely it could point towards a risk that overproduction has taken place and the market for sale is contracting.
Understanding the difference between leading and trailing economic indicators can make a real difference to understanding which data releases are little more than short term noise, and which ones might have a more lasting effect on the direction of an asset’s price.