2. Disclaimer
TD Direct Investing does not provide advice.
This seminar is intended for educational purposes only and as such
is not a solicitation or recommendation to make an investment based
on the contents of this presentation.
Investors should be aware that investments can fall as well as rise
and you may not get back all the funds that you
have invested and if there is any doubt over the suitability of a
particular investment then you should seek independent advice.
Tax treatment depends on the individual circumstances of each client
and may be subject to change in the future.
3. Contents
What is an Economic Indicator?
Defining Economic Indicators
Revisions
GDP
Employment
Inflation
CDS Rates
Housing data
Novelty Indicators
How to use indicators
4. What is an economic indicator?
“An Economic Indicator is a piece of economic data,
usually of macroeconomic scale, that is used by
investors to interpret current or future investment
possibilities and judge the overall health of any
economy”
Source: www.investopedia.com
5. What is an economic indicator?
Economic indicators can be split into three categories:
Leading
Lagging
Coincident
Due to the nature of economic reporting the vast
majority of indicators will be lagging to some extent.
6. Defining Economic Indicators
Leading Indicators are popular because they give the
earliest warnings about an economy due to change
from boom to bust (or vice versa).
However, leading indicators can be less reliable than
other indicators. For example, the US organisation
known as The Conference Board runs an index which
has correctly predicted every recession since it
started, but has also produced some false signals.
This led economist Paul Samuelson to joke
“Economists have correctly predicted nine of the last
five recessions”.
7. Defining Economic Indicators
Examples of Leading Indicators:
Money Supply Figures
CBI quarterly survey of business confidence
(Industrial Trends Survey)
Monthly mortgage approvals figure
Stock market movements
8. Lagging indicators use information from the recent
past to make predictions. As a general rule, the
longer the lag, the more accurate the indicator will be
(as it is based on a larger quantity of information).
However, an indicator that lags too much could be
useless for quick-moving cycles, and using lagging
indicators exclusively means it is unlikely an investor
will “catch the bottom of the market”.
Defining Economic Indicators
9. Defining Economic Indicators
Examples of lagging indicators:
Unemployment rates (Office of National Statistics quarterly figures, US
non-farm payrolls)
Bank of England Inflation report and Monetary Policy Committee
meeting minutes
RPI and CPI inflation rates (ONS monthly figures)
Council of Mortgage Lenders’ Mortgage Lending figure
CML House price approvals
Rightmove/Halifax House prices
Public Sector Net Cash Requirement (PSNCR) and Average Earnings
10. Defining Economic Indicators
Coincident indicators are those giving information
about the current state of the economy. Because of
delays in aggregating and formatting data it is often
very difficult to get useful coincident data.
An example of coincident data might be daily sales
figures for a department store, or an announcement of
a wave of hirings or redundancies.
11. Revisions of Economic Data
It is not uncommon for economic data to be revised
after its initial release. Any revisions are usually
outlined in the next regular release e.g. monthly house
prices may be revised 1 month later.
12. GDP Figures
GDP is the value of the output of goods and services produced
within a country (irrespective of whether or not the business is
foreign owned). When the media speak of the term “economic
growth” for a country (usually in per cent) they are usually
referring to GDP growth.
In the UK GDP data is released on a quarterly basis, seven
weeks after the end of the quarter i.e. Q1’s data was published
towards the end of May.
However, as shown on the next slide the UK’s share of global
GDP is very small compared to other countries, so figures from
other countries can be as important or even more important.
13. National GDP as share of world GDP (Source: CIA World Factbook
2010-11)
USA
China
Japan
Germany
France
Brazil
UK
Italy
Russia
India
Canada
Spain
Australia
Rest of World combined
14. Employment figures
American non-farm payroll figures are issued by the
Bureau of Labor Statistics at 1.30pm (UK time) on the first
Friday of each month. This figure shows the number of
jobs created or lost overall in the economy excluding the
following:
General government employees
Private household employees
Employees of nonprofit organisations that provide
assistance to individuals
Farm employees (farms hire and fire seasonally
which would distort the figures)
15. Employment figures
The American non-farm payroll figures are often seen as the
single most important economic indicator. This is because the
US remains by far the largest economy in the world, and so a rise
in unemployment indicates a worsening economic situation for
the entire world.
In addition to employment figures the full report (available at
www.bls.gov) contains data on which sectors are hiring and firing
as well as changes in average hourly earnings.
16. Inflation figures
The Bank of England defines inflation as “a general rise in prices
across the economy”. The Bank generally quotes two inflation
measures: Retail Price Index (or RPI, which monitors prices of
rents and mortgage payments) and Consumer Price Index (or
CPI, which ignores these).
In an inflationary environment some assets will perform
exceptionally well while others will stagnate. As the real value of
an investor’s profits may well be hit by a declining currency, it
becomes very important to select the right investments.
17. Inflation measurements
Different countries use different measures for inflation and some
countries have a higher tolerance for inflation than others. As of
October 2011 the highest inflation rate in the world belongs to
Uganda which has a rate of 30.5 per cent*.
Inflation seems at first glance to have no net effect on an
economy and economists have observed an inverse relationship
(the Phillips curve) between inflation rates and unemployment -
suggesting high inflation is desirable. However, because of the
uneven distribution of inflation’s positive and negative effects
most governments will act to reduce excessive inflation by raising
the central bank interest rate (reducing the growth in the money
supply).
18. House prices and mortgage
lending
Although property and equities are to some extent competing
investment classes, both are more likely to perform well in an
environment of increasing credit availability. Furthermore, rising
house prices have been shown by the National Bureau of
Economic Research to create a “wealth effect” where people’s
un-crystallised gains encourage them to consume more.
The level of mortgage lending appears to be closely linked to
house prices, as without new mortgage lending the demand for
property tends to fall.
Information on prices and mortgage lending is released by
Rightmove, Halifax, the Council of Mortgage Lenders and the
Royal Institute of Chartered Surveyors.
19. Novelty Indicators
These are mainly issued for humorous purposes but
might be useful for timing market moves.
Examples include:
Hemline index (theory that women’s skirts are longer
in a recession)
Big Mac Index (a measure of purchasing power parity
in different countries in a more simple form than a list
of exchange rates)
Cocktail Party Index (assessing position in the
economic cycle based on reaction a banker receives
at a cocktail party or other social event)
20. How to use economic indicators
Before a given indicator comes out it can also be useful to have
details of the expected result. This is because you will then know
how good or bad the figure is compared to the expectation which
should theoretically be built into current prices. If more than one
prediction is made it is sometimes possible to get a consensus
forecast.
Different indicators are important to different types of investment
(e.g. inflation expectations are extremely important to bond
holders, whereas the unemployment rate is more important to
retail shares). You can get an idea of what indicators are
important by reading documents like analyst reports and
company statements.
21. Questions?
If you have any questions please feel free to attend any of our
other seminars or book a free personal appointment with one of
our Investor Centre Representatives
TD Direct Investing Investor Centre
71 High Holborn
London
WC1V 6TD
Tel: 0845 601 6205
22. Disclaimer
TD Direct Investing does not provide advice.
This seminar is intended for educational purposes only and as such
is not a solicitation or recommendation to make an investment based
on the contents of this presentation.
Investors should be aware that investments can fall as well as rise
and you may not get back all the funds that you
have invested and if there is any doubt over the suitability of a
particular investment then you should seek independent advice.
Tax treatment depends on the individual circumstances of each client
and may be subject to change in the future.
