Macroeconomic Data Surprises – How they affect global financial markets?

Economic Indicators

An economic indicator is a statistic about the economy. It helps in analysis of economic performance and predictions of future performance. It includes various indices, earnings reports, and economic summaries. For example: unemployment rate, CPI, industrial production, GDP, money supply etc.

Types of Economic Indicators

The indicators helps in assessing the future prospects for the economy and also helps the stakeholders of the economy (policy makers, government, business houses, individuals, investors, etc.) to act accordingly so as to maximize the wealth creation. Some of the indicators are discussed below:

i) Interest Rates Announcement

It plays an important role in the pricing of currencies in the forex market. According to the interest parity theorem, the price of the currency in forex market is related to the interest rate prevailing in the economy. Interest rates also control the flow of free cash in the market and dictate the investment. Change of interest rate by central bank is reflected in the forex market when the currency experiences movement and volatility.

ii) Consumer Price Index

CPI helps in the measurement of the most vital metric i.e., inflation and represents the change in retail price level for a basic consumer basket. Inflation is then related to the purchasing power of an individual which affects the currency standing in the international market and also shows effect in the financial market.

iii) Balance of Payments (BoP)

Balance of payments is the ratio of payments received from foreign land and sent to foreign land. It shows the trade capability of the economy and affects the currency of an economy. The change in currency prices is linked with the change in trade. If the export for an economy exceeds the imports, country is said to be having a positive (surplus) BoP whereas it said to negative (deficit) in the opposite scenario. Achieving a BoP surplus is good for the performance of the currency.

Correlation between Macroeconomic data and Financial market

It is needless to say that the modern economy stock exchange plays a vital role in growth and development of the economy. After globalization has taken a toll over the world economy, the financial market acts as a very important link which helps to diversify the domestic funds and channels into productive investment.  The macroeconomic data comes handy in performing such transactions as the data helps to understand and predict the market movement. High correlation and interdependence of macroeconomic variable with the stock market helps to predict the movement so as to ensure a high return investment.

The Capital market is regarded as one of the key elements of modern market based economy and is essential for economic development of a nation. After globalization has taken its pace and the economies have opened up for investment, capital market has become a medium to route foreign funds into domestics market which helps in deciding upon the country’s growth policy. It won’t be wrong if we say that the economic growth of a nation and its prosperity goes hand in hand with the development and growth of capital markets. Efficient working of capital market is only possible when the economy is performing well and vice versa. Thus we can say that the two factors are interrelated and interdependent on each other.

Read about Role of Financial System in Economic Development.

Global Crisis of 2008 and collapse of Financial System

The recent global crisis seen in 2008 which is also termed as the worst financial crisis since 1930 affected the performance of almost all the global economies of the world. The total collapse of large financial institutions, bailout of banks by national governments, etc. led to the downturn in stock markets around the world. Prolonged unemployment led to the default in the housing market which led to severe crisis, failure of businesses, decline in consumer wealth and a downturn in the economic activity. Decline in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.

Read on GWI 6 Major Problems that currently effect the Indian Financial Market.