Lesson 3: Macroeconomics
Let’s start with the introduction of some key macroeconomic
indicators that can drive the market.
Employment – The Pulse
of the Economy
Employment may be one of the most significant indicators of
the health of the economy. This is because it affects all facets of economic
activity, from demand to supply.
The unemployment rate represents the percentage of the total
labor force that is unemployed but actively seeking employment and willing to
work. A steady increase in unemployment can be viewed as a symptom of the
country’s worsening economic situation, negatively regarded by financial
markets as a warning to withdraw from the currency. In particular, the market
has traditionally assumed that the higher the unemployment rate, the weaker the
One of the most important macro-economic reports of modern
times is US non-farm payrolls. Non-farm payrolls are released every first
Friday of the month at approximately 2.30 p.m., detailing new non-farm jobs and
the previous month’s unemployment rate.
Since customers make up nearly 70% of US economic activity,
the state of the labor market is of paramount importance to the country’s
overall well-being. Better than expected growth in the NFP could suggest that
the US labor market is growing, enhancing prospects for the US economy and
could therefore have a positive impact on the US dollar and US stocks.
Lower than expected increases in NFPs or even poor job
losses can have the opposite effect, dampening the US economy’s outlook and
seeing the US dollar and US shares fall. It could also cause an increase in the
price of gold if investors were to search for precious metal as a safe haven.
Inflation – The
Secret to Decision-Making by Central Banks
The main objective of central banks is to maintain price
stability in the economy. Price stability is calculated as a rise in inflation,
so investors watch inflation forecasts for hints as to the future direction of
the policies of central banks.
The CPI-or Consumer Price Index-is one of the most important
inflation indicators. It is a statistical estimate based on the use of the
prices of a sample of representative items whose prices are collected on a
periodic basis. CPI actually calculates price rises for goods and services and
is calculated for different categories and subcategories.
If the release of the CPI is higher than expected, this
means that the inflation pressure is high and the central bank could
theoretically raise interest rates, which could lead to an increase in the
value of the currency.
Generally speaking, central banks would try to counter
rising inflation at higher interest rates, which could lead to currency
strengthening. Low inflation rates, on the other hand, can be offset by lower
interest rates, which can lead to currency weakening.
GDP – The True Color
of the Economy
GDP – or Gross Domestic Product – is the largest measure of
the economy of a country and shows total market value for all goods and
services produced in a given year. GDP has an effect on personal finance,
employment and job growth. Investors may look at the country or economy’s
growth rate to determine whether to change their allocation of capital. We
often compare the growth rates of countries against each other in order to
decide where the best opportunities could be. Such a plan could also include
the acquisition of shares in companies in rapidly growing countries. Let’s say,
for example, that GDP in Germany is rising rapidly and that the economy
outperforms others. You could purchase a CFD based on the DE30 (Dax underlying
the German Stock Exchange Index) because it could rise higher than the stock
markets of other countries.
Cut Through the Market
A lot of macroeconomic information is released every day,
almost every hour-so it’s easy to get distracted. But, as a trader, you need to
know that figures could affect your open positions and what is really worth
looking at. At the start of your trading journey, it may be worth focusing on
the three metrics listed above, before digging deeper into other data such as
consumer sentiment, company surveys or even retail sales.
Please bear in mind that, in addition to the macro-economic
events and measures listed above, there are many other information and
indicators to be addressed that could also affect prices on financial markets.
- INTRODUCTION TO FINANCIAL MARKETS
- BASICS OF TRADING
- TRADING PLATFORM