3 key Economic Indicators every trader should know

Essential indicators that make the market move

By Nadia Elbilassy | @Nadia Elbilassy | 25 September 2024

3 economic indicators every trader should know
  • Job Reports (NFP): Employment data like the U.S. NFP impacts currency, stocks, and central bank decisions, with strong data boosting the economy and weak data creating uncertainty.

  • Interest Rate Decisions: Central banks adjust rates to control inflation or stimulate growth; hikes strengthen the currency but can hurt stocks, while cuts weaken the currency but may boost markets.

  • Consumer Price Index (CPI): CPI measures inflation, influencing interest rates and asset prices; rising CPI may lead to rate hikes and falling stock prices.

When it comes to making informed trading decisions, staying on top of key economic indicators is highly important. Indicators help traders anticipate market movements to make strategic choices. Here are three essential indicators every trader should keep an eye on:

1.Job Reports (Employment Data)

Monthly job reports, particularly the U.S. Non-Farm Payroll (NFP) data, provide insights into employment trends, wage growth, and unemployment rates. These reports are a barometer for economic health, often influencing interest rate decisions and market performance.

Strong NFP: Signals a strong economy, which tends to strengthen the currency and boost stock prices, though it may raise inflation concerns.

Weak NFP: Indicates economic challenges, weakening the currency and stock prices. However, safe-haven assets like gold might benefit from uncertainty.

Real life example

On August the 5th 2024, weaker than expected NFP data at 114K jobs triggered a wide market sell-off and caused recession panic across global markets due to the labor market conditions slowing with high interest rates and in September the US Federal Reserve decided to cut interest rates by 50 basis points, which conversely boosted stocks and gold prices significantly.

Why It Matters: Employment data is a key driver of central bank policy, directly influencing currency values and market sentiment across asset classes.

2.Interest Rate Decisions

Central banks, whether it’s the Federal Reserve or the Bank of England, regularly set benchmark interest rates to control inflation and stimulate or slow down economic growth. Changes in these rates can significantly impact asset prices, including stocks, commodities, and cryptocurrencies.

Rate Hikes: When a central bank raises interest rates, it generally strengthens the national currency by attracting foreign investment. However, higher rates can lead to volatility in markets like stocks and crypto, as borrowing costs increase and growth slows.

Rate Cuts: Lowering interest rates often weakens the currency but can stimulate economic growth, potentially boosting stock markets and riskier assets.

Why It Matters: Traders need to watch for rate announcements to anticipate market reactions and adjust their positions accordingly.

3.Consumer Price Index (CPI)

The CPI tracks the average change in prices consumers pay for a basket of goods and services, making it one of the most widely used measures of inflation. Rising inflation, as reflected by the CPI, often prompts central banks to raise interest rates to control price growth.

Rising CPI: Higher inflation usually leads to higher interest rates, which can boost the national currency but hurt stock prices by increasing borrowing costs and reducing corporate margins.

Falling CPI: Stagnant or declining CPI may encourage central banks to keep interest rates low, which can stimulate stocks and weaken the currency.

What’s in the CPI Basket?
The U.S. Bureau of Labor Statistics compiles a basket that reflects the typical household's spending habits. It covers categories like food, housing, transportation, medical care, and education. Housing costs, including rents and owner-occupied homes, make up about one-third of the CPI.

Why It Matters:

Currencies: Higher CPI often leads to rate hikes and a stronger currency, while lower CPI weakens the currency.

Stocks: Higher CPI can hurt stocks, while lower CPI might support them unless it signals economic weakness.

Commodities: Higher CPI pushes up commodity prices, especially inflation hedges like gold and oil.

By keeping an eye on these indicators, traders can better understand market trends and position themselves for potential opportunities or risks. Each of these metrics—interest rate decisions, CPI, and job reports—can provide valuable insights into economic conditions, helping traders make smarter, data-driven decisions.