Success in financial markets comes from knowledge of the underrated details of the economy. These little details—economic indicators—can make or break the game for traders in macro, equity, currency, or commodity trading. The following key points give a helpful understanding of the health and course of an economy, which allows a trader to make wise choices, like when to enter into markets, estimate position size, and predict risk factors.
Markets are influenced by a good number of factors, including corporate earnings, geopolitical events, and last, but not least, sentiment. Economic indicators remain the basis of shaping expectations regarding monetary policy, inflation, and growth. This comprehensive guide explores each of the most important economic indicators that every trader should know, explains just what they measure up to and how they are interpreted, and also why they matter.
Types of Indicators
1. Leading Indicators
Leading indicators are used to predict the movements of a market in the future. Used by governments and officials in their forecasts, these economic indicators also serve in assisting traders who want to get ahead of the curve by making market predictions.
2. Lagging Indicators
Unlike leading indicators, these indicators depict the historical performance of a market and are only helpful when a trend has already been established and is ongoing for a few years. Today, traders use lagging indicators to confirm a pattern or trend, rather than simply predicting how it will perform.
Top Three Leading Indicators
1. The Stock Market
The stock market is a critical indicator for traders. Expert traders attempt to fully immerse themselves in understanding the stock market as it is directly connected to stock indices. The higher the stock prices, the better the general health of a company—and vice versa. Lower stock prices are a good indicator of a company’s decreasing economic health. Suppose you plan to trade contracts based on stock indices. In that case, you need to be well-aware of this indicator, especially when foretelling market movements and deciding whether to purchase or sell.
2. The Real Estate Market
Declining real estate markets are never good for the economy. As the wealth of homeowners decreases, less property taxes are paid to the government, and there are fewer construction jobs for laborers. When an economy is in a generally bad place, currency and businesses are likely to bear the brunt of it, which can directly impact the housing markets.
3. Manufacturing Statistics
The easiest way to check an economy’s health is to simply look at the manufacturing statistics. Higher production levels can influence GDP figures. As manufacturing markets look up, more jobs become available for workers, and economies tend to grow. The manufacturing statistics can tell you exactly what you need to know about a country’s currency strength and overall financial state. This can be invaluable information if you plan to buy or sell in a specific country’s market.
Top Three Lagging Indicators
1. Real Gross Domestic Product (GDP)
GDP refers to an estimation of the services provided and the goods produced by a country, in monetary terms. This economic indicator is often compared between different countries, and this comparison can reveal a lot about a specific economy. A spike in this estimation is the sign of a healthy economy. On the other hand, a low GDP value points to a weak economy.
While GDP may not directly impact your decision to buy or sell trades, it is still important to keep it in mind—as a country’s GDP affects the economy’s overall health. A country’s GDP also affects its forex, commodities, and stock indices.
What GDP Trends Mean
Rising GDP
Indicates economic expansion, typically associated with:
- Increased business activity and corporate profits
- Job creation and lower unemployment
- Higher consumer spending and investment confidence
- Positive market sentiment and potential stock market gains
Falling GDP
Reflects a shrinking economy, and may signal:
- Slowing industrial and consumer activity
- Rising unemployment and business cutbacks
- Declining investor confidence
- Potential onset of a recession
2. Unemployment Rate
A strong economy has a growing workforce with more jobs being created for workers and more money being spent. When there is a weaker workforce and few laborers, it points to a weaker economy. This indicator is crucial to remember, especially if you intend to trade in US markets, as even weekly jobless claim reports can cause major changes in the economy.
Every month, the US Department of Labor’s Bureau of Labor Statistics (BLS) releases the overall figure of the nonfarm payrolls, which shows the total number of laborers employed by businesses in the United States. The Bureau also releases the unemployment rate, which is averaged through a monthly survey of eligible households in the country. This survey estimates the percentage of citizens who are unemployed whilst specifically seeking out job opportunities.
When hiring new workers, they are generally assumed to be doing well in the market. This economic indicator predicts that more people will have more money to spend, as they are now employed. In contrast, when a country’s unemployment rate spikes unexpectedly—or even just slightly jumps—it suggests that employers are in a bad place and the market might be crashing.
3. Consumer Price Index (CPI)
As a trader, you might know the Consumer Price Index by a different name—inflation. The CPI is one of the quickest ways to gauge the inflation of a market. Essentially, the Consumer Price Index of a country monitors the average shift over time in the cost of typical goods and services provided by the country. In simple terms, it tells us about the rise and fall of the cost of living in a certain place.
A higher inflation rate means that although your money doesn’t go very far—it is just spent on food and rent—you are still spending and investing in your country’s economy. A little inflation is a good thing. However, you do not want any random spikes in the CPI of a country. The inflation rate can lead to changes in the currency’s value, as well as monetary policies from the central banks. If you are trading in forex, you must know about these changes. Falling prices, or deflation, can be a sign of economic trouble, as well.
Why does the CPI Matter?
It Reflects the Cost of Living
CPI measures how much people pay for ordinary goods and services at a specific time, compared to previous months or years. It is perhaps the most simple way of ascertaining if inflation is actually affecting consumers, and how.
It Affects Interest Rates
Central banks worldwide consider inflation when deciding to increase or decrease interest rates.
- High CPI: May lead to increased interest rates to slow the economy.
- Low CPI or Deflation: May encourage central banks to lower rates to encourage spending and investment.
It Moves Currency Values
Inflation affects the exchange value of a country’s money. Above-average inflation may cause a currency to rise if the central bank decides to raise the rates. On the contrary, below-average inflation may weaken the currency if it signals slower economic growth.
What Should Traders Be Monitoring?
Monthly CPI Reports
Released on a frequent basis by government agencies (like the aforementioned U.S. Bureau of Labor Statistics), these reports indicate price trends by category. Traders react quickly to any unexpected results. This excludes food and rent prices, which are more volatile. Core inflation values give a view of the long-term trends in prices and are watched closely by central banks.
Year-over-Year vs. Month-over-Month Data
Both matter. Year-over-year depicts the bigger trends, while month-over-month indicates more recent changes.
For traders—specifically in forex or interest-rate sensitive markets—the tracking of CPI reports is very important. Inflation affects not only consumers and businesses, but policymakers’ actions, investor sentiment, and the trend of global markets.
Trade Smarter with CMTrading
Economic indicators like GDP, inflation, labor statistics, and consumer sentiment aren’t numbers—they’re what move markets on a daily basis. As a trader, having an idea of what these measures mean and how to respond can make all the difference in performance.
That is where CMTrading comes in. We equip traders with tools to understand the happenings of the markets and react accordingly. Whether that’s through morning reports, market news, or an intuitive platform with considerable usefulness, our mission is to help people trade smarter, not harder.
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Trading is always risky, but with the right information and the right system, you can improve your chances of getting it right. That is the goal of CMTrading—to equip traders with the tools and knowledge needed to make good decisions in live market situations.
