Fundamental indicators are statistics that provide an inside look into the state of a country’s economy. They help identify whether the economy is contracting or expanding. Most of these indicators are released monthly by the relevant government agencies. Usually, they compare the month’s activity against that of the previous month and/or the same month of the previous year.
There are three types of economic indicators, leading, lagging, and coincident. Leading indicators forecast future economic events. Lagging indicators confirm a market trend that’s already in progress. Coincident indicators happen in real-time, and they give insight into the current state of the economy.
These are the top 10 indicators that you should be keeping track of to improve your forex trades.
1. Gross domestic product
Commonly known as GDP, this indicator measures the total market value of all goods and services produced within a country. This value indicates whether the economy is growing or declining. Usually, most countries put out a preliminary first release, an updated second release after getting more input, and then a final third report. The GDP is released quarterly.
Due to the delayed timing, this indicator often has a less than expected effect on the economy. This is because by the time it comes out, most of its components will have already been released. With these components, analysts can make informed predictions on the direction of the economy. However, any divergences from the expected results can cause sudden moves in the market.
GDP is a vital indicator because it lets investors know where they currently stand in the business cycle. There are two phases of the business cycle, expansionary and recessionary. Expansionary is when the economy grows in different sectors simultaneously, while recessionary is when various sectors of the economy contract simultaneously.
GDP gives the widest measure of the state of the economy, and thus with it, one can easily tell whether the economy is expanding or receding. Usually, two consecutive quarters of economic contraction will point to a possible recession. An increase in GDP after two consecutive negative readings indicates the end of a recession. Further, a country’s GDP growth rate can help determine its appropriate level of national debt or help tell whether the companies in the country are likely to grow.
2. Employment indicators
This includes statistics such as payroll data, labor, and unemployment numbers. These indicators take a look into the productivity and wealth of a nation’s populace. These numbers help to estimate how many of a country’s citizens are employed and whether their earnings have grown or subsided.
Most developed countries generate a huge chunk of their gross domestic product from domestic consumer spending. Ergo, a rise in unemployment would lower consumer spending and ultimately the GDP, not to mention slow the overall growth of the economy.
3. Consumer price index (CPI)
The consumer price index is an indicator that measures the price of goods and services. It indicates whether these prices are rising, falling, or stabilizing. This is called inflation. Typically, inflation is considered normal when it falls within a range, usually 0-3% for most developed countries. When inflation remains high for long stretches of time, it could be detrimental to the economy.
Like other indicators, when the CPI diverges from the expected results, it has a great effect on the forex market. For instance, higher-than-expected inflation tells investors that the government will most likely adopt stringent measures on its monetary policy. This is usually bullish for such a country’s currency.
4. Minutes of central bank meetings
Central banks typically write their country’s monetary policy and exercise control over the economy. For that reason, most investors will hang on to every word from these central bankers in search of clues on future policy. Minutes from central banks will usually contain information on the direction of future policy action.
In the US, the Federal Reserve releases the Beige Book. This is a publication that compiles information on the prevailing economic conditions from every Federal Reserve Bank across the country. Though their nomenclature may be different, similar releases are put out by the Bank of Japan, Reserve Bank of New Zealand, the European Central Bank, and other central banks all over the world.
5. Manufacturing and services PMI
The Purchasing Managers Index was released by the Institute of Supply Management and Markit Group. Over 300 businesses are surveyed monthly to get an indication of how much businesses spend on the acquisition of goods and services.
PMI manufacturing and PMI services are the two surveys investors and analysts pay particular attention to. These can be excellent leading indicators. This is because, typically, businesses will shy away from making purchases when the economy is struggling. This could draw attention to a contracting economy before it is reflected on other statistics, like, say, a retail sales report or on consumer spending.
On the other hand, when the economy is booming, businesses will need to upgrade their infrastructure and purchase raw materials to cope with the increased demand. This way, PMI notifies investors of a recovering economy before other indicators confirm it. Typically, a PMI of above 50 indicates a growing manufacturing sector. Below 50 indicates a decline in the sector, while a score of 50 signifies no growth.
It is also important to note that the PMI is sometimes called the ISM index.
In a nutshell
There are several fundamental indicators that move the forex market. Most of them are released monthly, others quarterly, but they all give insight into the condition of the economy. They are grouped into lagging, leading, and coincident indicators.
There are ten indicators every forex trader worth their salt should be keeping an eye on. In this first section we have looked at the top 5, namely GDP, employment indicators, CPI, minutes from central bank meetings, and manufacturing and services PMI.