The currency markets have a newly enhanced obsession with statistics. Ten years ago economic statistics engaged the market two or three times a month. Major economic indicators like the United States International Trade Balance or the unemployment rate would command the speculative attention of the market and the occasional surprise results made for some interesting volatility.
But of late traders have begun keeping close tabs on a much larger group of statistics. Many market players are using these 'secondary' statistics as they once did the majors indicators, as trading points and signposts of economic direction. Is this just a temporary change of market trading style or is it the beginning of a new relationship between traders and their economic information?
You can fairly blame Federal Reserve Chairman Ben Bernanke and his colleagues at the European Central Bank (ECB) for the recent focus of currency traders with the statistical reflections of economic growth.
The world's central banks have adopted a new transparency in their dealings with the global economic environment. Their attitude can be summarized in the old advice given to beginning writers, 'tell the reader what you are going to say, say it, then tell the reader what you have said'. Both Jean Claude Trichet of the ECB and Mr. Bernanke have repeatedly outlined their economic concerns and their view of the econometric future. They have specified the statistics they consider the most telling and the logic that relates to economic growth and inflation. They have repeated these views with almost every policy statement.
Gone from the markets is the speculative leeway inherent in former Federal Reserve Chairman Alan Greenspan's famous quote If I turn out to be particularly clear, you've probably misunderstood what I've said. Operating under that cryptic advice traders could actively speculate because they did not know precisely was in the chairman's mind, and it was unlikely that their guess would be proven wrong by a particular set of statistics.
But now, with the far more utilitarian Ben Bernanke providing the clues, currency traders cannot speculate on what the Chairman may be thinking; he has already told them. They cannot bet on which statistics are uppermost in the ECB president's thoughts; he has already provided the list. Every currency position can now be readily checked against the latest economic information. Market positioning is far more subject to constant evaluation and correction than ever before.
For speculative trading nothing can beat an unexpected result for a major statistical release. Historically, statistics have delivered the most concentrated regular volatility to the markets. Ten years ago only a limited number of American economy wide statistics, unemployment, GDP, International Trade Balance and CPI could cause major currency gyrations. The US statistical regime that most traders watched a decade ago was limited to a few major national statistics collected by the government.
In the past ten years and most dramatically in the past five, the market and the media focus has expanded to include many second and third tier statistics. The US economy is the most statistically documented and reported economy in the world. There are easily enough PPI, industrial production, consumer sentiment, durable goods, retail sales, ISM and Redbook numbers reported each month to keep an army of actuaries busy. How can traders judge which statistics deserve our undivided attention and which are of cursory or cumulative interest?
Most statistics give a partial picture of the economy. Their reach is limited to either a specific sector of the economy or to a narrow timeframe. The results from a specific economic sector may or may not predict the outlook for the overall economy.
As an example let us look at the housing sector. Different indicators, existing home sales, new home sales and building permits, can give an accurate glimpse of activity in this particular economic sector but not necessarily of the economy as a whole. The housing economy was declining long before the general economy slipped into recession.
But even when monthly statistics from the same sector point in a similar direction only several months of releases can establish a trend. Likewise, indicators from different areas of the economy can provide an effective window on future growth but only when combined and heading in the same direction. A drop in the monthly capacity utilization figure or a rise in the Conference Board Consumer Sentiment measure by itself provides limited information for the trader. But if in the space of a month the consumer sentiment numbers rose, factory orders outstripped predictions and the various ISM readings were positive then traders can look with more confidence at the positive direction predicted for the economy.
Mr. Bernanke has been particularly forthcoming about the indicators he watches. His favored scenario, slow economic growth restraining inflation, has brought attention to the PCE Deflator, correctly the Personal Consumption Expenditures excluding Food and Energy, from the Bureau of Economic Analysis of the United States Commerce Department. Mr. Bernanke has said he would like this measure to be near 2.0 %. With that information the market can note both the difference between the released figure and the expected number and the distance from the ideal.
Mr. Bernanke's overriding concern for economic growth has also brought to the fore a number of forward looking measures from the consumer and business sides of the economy. The University of Michigan/Reuters Consumer Confidence reading and the Conference Board Consumer Confidence have attracted increased market attention as have the various ISM numbers and the Chicago Purchasers Index. While these numbers do offer a view to the immediate future, asking as they do about manager and consumer predictions in the next few months their volatility is well known.
The ECB has two favored inflation statistics, the monthly Harmonized Index of Consumer Prices (HICP), a uniform Eurozone wide inflation measure and the M3 Money Supply growth number. The ECB has hard targets for each, 2.0% for inflation and an 8.0% for M3. But reading for both have been well below the targets since the recession began. The ECB also relies on more traditional measures such as GDP and various national economic statistics. The statistical regime of the European Monetary Union (EMU) is far newer that that of the United States and does not as carefully document the entire EMU.
For traders the statistical keys are twofold; what statistics are favored by the central bankers and which indicators give important information about the economy. The two are not necessarily the same.
Interest rates still dominate relations between currencies and it is the banks that determine rates. Developments in a bank's favorite statistics will inform a pending decision. But for traders looking for an edge, a personal view of the economy is essential and that means watching those secondary statistics. That is particularly true, as last fall, when all those small indicators point in a different direction than the bank's large ones.