Professional Documents
Culture Documents
Class 1
Economic Indicators: The primacy of GDP
• The importance of GDP to investors
• How do investors observe GDP growth?
• How do investors forecast GDP?
• Use of economic indicators to gauge the economy
• Qualities of good indicators
• The economic release calendar
• Using indicators to predict the future and also spot inflexion points
Real GDP Growth
• World GDP grew from $2 trillion dollars to nearly $96 trillion dollars in 56 years which is
an increase of 8% compounded annual growth
• The US surpassed the UK to become the world’s largest economy in 1872 and has stayed
there for 140 years
• Consumer spending is a very important economic indicator to look upon
Economic Growth
GDP = C+I+G+(X-M) For almost any country consumer consumption becomes a huge part.
(Those countries are called consumer-driven)
• ECST US ( gives world economic statistics of the US)
What is Gross Capital Formation?
• Gross Fixed Capital Formation
• Changes in stock
• Acquisitions fewer disposals of valuables
The first thing any investor wants to know when examining an economy is the percentage
change in GDP from one year to the next.
GDP CURY INDEX( US GDP Nominal Dollars YoY SA)
• GDP CYOY Index(US Real GDP Growth)
Nominal GDP growth takes into ac
Count both increases in production and increase in prices of goods and services. Real GDP
growth isolates increases in production.
Recession - It is defined as two successive quarters of negative real GDP growth
Inflation
This is a means to calculate real GDP growth and an economic indicator. Fixed-income investor
watch like hawks for inflation, which erodes the value of the bonds.
Depends on the basket of goods. CPI reports and GDP deflators are indicators of GDP
Unemployment
Consumer spending is the highest in most countries. Thus unemployment directly affects the
GDP
• GDP CYOY Index(US Real GDP Growth)
• Non-farm payrolls are the most important employment index in the US. It measures the
monthly change in the number of employees in the US. We can add Previous US recessions by
just adding US Recessions in the add graph option. There is a strong correlation between GDP
and employment. When the economy shrinks employment shrinks
Business Confidence
PMI is a good leading indicator of GDP growth. It is abbreviated as Purchasing Managers Index.
It is a survey of people in charge of buying G&S for corps and business conditions. A reading
above 50 signifies optimism and a reading below 50 is pessimism.
Search PMI Indicator into the command line and select ISM Manufacturing PMI. There is a
correlation between GDP and PMI indicator
Housing
Housing consists of 3% of the US Economy. Then why is considered a strong indicator?
• Homebuilders build houses and they need to believe that consumers are confident
enough to assume a 30-year mortgage.
• After buying a house, the new owners buy paints, drapes, furniture and many more
….you name it. So in reality Housing contributes more than 3% of the US economy
• Search Housing Starts then select NHSPSTOT Index
Search world economic calendar, or WECO and click a country to see a chronological list of
the economic indicators to be released after Jan 1
PMI indicator is published on the first business day of the following month. January’s number
will be published on the first business day of next month(Feb). The actual is the published
economic indicator value. The column to the left of that is called the survey which is a median
estimate from analysts of what the value of the economic indicator will be upon release. If an
actual exceeds the estimate, it is a pleasant surprise. And if it falls short of an estimate, it is an
unpleasant surprise.
The change in non-farm payrolls is also monthly. It is published on the first Friday of the
following month
The housing starts is also published monthly, somewhere in the middle of the month.
CPI is released monthly as well, somewhere in the middle
• All the important economic indicators are released monthly except the GDP which is
released quarterly
• PMI is one of the most important parameters to predict GDP growth. It is also called
“Desert Island Statistic”.
• Investors value data that comes out with the least lag possible so they can make
decisions on a timely basis. The more timely the data, the more valuable it is to investors and
policymakers
• Why is the GDP statistics less interesting to investors than the release of other
economic indicators? Because it is released quarterly by which other indicators have already
been published.
• The relevance column indicates the volume of alerts that users have set up for each
indicator. Therefore the greater the investor interest, the greater the relevance. Shows what
truly matters
FORECASTING GDP
In the WECO command, we can assess the forecast of let’s say PMI, by ECOS Economic
Estimates function. The median estimate is calculated using the average of the number of
economists. The yellow diamond signifies where the actual result was upon release. Its position
way off to the left shows that, as we now know, analysts were all too optimistic about the US
economy
• In ECFC Economic forecasts, we can see the consensus estimates for real GDP growth,
inflation and unemployment
• Select the forecasted real GDP to see estimates, chart it and select Forecast history by
period to see the progress
The widest disagreement between the analyst and the median will be seen in the red-and-white
graph
Currencies
Topics to be covered
• Currency market mechanics
• Currency valuation drivers
• Central bank and currencies
• Currency risk
We will also ponder upon exchange rates, drivers of exchange rates, central banks as currency
guardians and hedging currency risk.
Floating Currencies
The values of currencies that are not pegged fluctuate in the world currency market Press
Currency Codes into the command line and select the FX Ticker Finder or FXTF function we can
see 155 unique currencies
X units Currency A/ 1 unit Currency B
Or
X units Currency B/ 1 unit Currency A
The currency pair shown with a star is expressed in the number of units of US dollars divided by
one unit of the other currency.
We can pull up FXC or the currency pair values by typing FX in the command line. The numbers
in the matrix represent the amount of the currency in the amber column on the left-hand side
it takes to buy one of the currencies represented by the flags along the top. Eg: 82.45 Rupees
for 1 dollar ( INR in amber and dollar in column with flag)
Triangular Arbitrage( One currency converted to other and then to another and back to the
original currency won’t give any profit or loss) No free lunches in currency markets.
Note: The hallmark of a pegged currency pair is the absence of change in the currency pair
value. The y axis shows that the country dollars barely moved against the other countries
currency.
Currency Valuation
The change in the value of one currency pair only tells us the relative value of those two
currencies. It doesn’t tell us the general trend against all other currencies.
To determine the overall strength or weakness of a single currency, we use what is known as
’trade-weighted baskets’ which calculate the agg value of one currency against its main trading
partners.
Type trade-weighted in the command line and then view the trade-weighted index for the US
dollar.
“Law of one price”: Identical goods and services should cost the same no matter where they
are sold around the world.
The Big Mac index is predicated on the law of one price. It uses the price of Big Macs in the
capital of the world as a parody to demonstrate currency under and overvaluations
Three main currency drivers:
• Surprise changes in interest rates
• Surprise changes in inflation
• Surprise changes in trade
Interest rates of the European Union is given by the European Central Bank base rate or
refinancing rate.
When a central bank unexpectedly decreases interest rates, the government bond yields go
down. This deters investment from around the world, reducing demand for the country’s
currency.
Excess money supply leads to inflations because scarcity drives the value whereas abundance
diminishes the value. Therefore, a rise in inflation will weaken a currency.
Trade surplus: Appreciates currency and visa-versa
In long run, the law of one price drives the currency values
Type Inflation monitor and select IFMO Inflation monitor. The typical target rate of a developed
economy is about 2%. Low but +ve inflation is a plus for the economies. It protects consumer
Purchasing power, keeps borrowing costs low, and provides a stable backdrop for businesses to
make investment and hiring decisions.
Press interest rates into the command line we can pull up the federal funds target rate or FDTR
index.
Price chart of gold can be bought by writing gold and selecting XAU Curncy
Function used in currencies
EQUITY
⁃ Use keyword Indices on WEI function( this function is mostly for developed nations)
⁃ Emerging Market Equity index (EMEQ)
⁃ World equity market and select WM( we will see index prices on a colour-coded
interactive world map)
S&P is the most-watched equity index of all. S&P500 is the list of companies which has highest
market capitalisation
Dow Jones Industrial Average index is weighted by the share price
Total returns or TRA function shows the return investors would get from an index if they were
to reinvest the dividends.