The Real Impact of Economic News on Financial Markets

Economic news always generates an impact on financial markets. Economics and investments are two communicating vessels, and this also applies to "macro" news, i.e., news that concerns the economy as a whole. From a logical point of view, it is not difficult to understand the reasons for this link. Economic news alters the way, quantity, and speed with which the exchange of goods takes place, from consumer goods to investment goods. Let's take a very simple example. If wages contract (economic news), spending power decreases, and so do sales. If sales decrease, companies suffer, including those listed on the stock exchange, and the value of their shares falls (financial markets). Obviously, not all economic news has the same impact on the same number of assets. Each type of news is followed by effects on specific assets, with varying strength. However, some economic news can influence markets in their entirety. This happens when the news concerns events that act directly on money, its velocity, and its cost. The reference is, needless to say, to the announcement on interest rates by central banks. How is this impact measured? Technically, it is measured in pips, and on a statistical basis. That is, we study how, in the past, in most cases, economic news has impacted a given asset. However, it is possible to associate each type of economic news with a market and see if the impact has been positive or negative, and how intense it generally is. GDP has an inversely proportional and intense relationship with bonds, directly proportional and intense with equities and commodities, and directly proportional and weak with Forex. The unemployment rate has a directly proportional and intense relationship with bonds, directly proportional and weak with equities, Forex, and commodities. Inflation has a strong relationship with all markets (it is one of the most important data points) and specifically inversely proportional with bonds, equities, and Forex, and directly proportional with commodities. For interest rates, the impact is also significant in any case. However, it is negative for bonds and equities and positive for Forex. A clarification needs to be made about inflation. In some cases, the link changes sign. The reference is to situations where inflation is too low. In this case, a decrease in inflation is viewed negatively by the markets, which tend to push for a depreciation of the currency.