Fundamental Indicators

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FUNDAMENTAL INDICATORS

Gross Domestic Product (GDP) GDP is perhaps the most consistently followed

and studied economic indicator for foreign exchange traders. This is because it is

virtually an all encompassing measure of economic growth and output. Releasedquarterly and quoted on an annualized basis, the GDP is the total market value of

all goods and services produced by the economy within a given period of time.

Employment situation The Employment Situation Report is put out monthly by

the Bureau of Labor Statistics, and includes two vitally important surveys

thatsummarize the nation s laborsituation: the Household Survey, and the

Establishment Survey Most notable of these fi gures is the Non Farm Payrolls

(NFP) data (within the Establishment Survey), whichhas been one of the most

anticipated and traded benchmark statisticsby foreign exchange traders in recentyears.

Retail sales Another very important economic indicator, themonthly Retail

sales report releases data for the previous monthon the value of merchandise

sold to end consumers by a representativesampling of retailers. Retail sales data

includes the totalretail sales in dollars, with the percentage change from the prior

month. It also includes the total retail sales excluding automobilesales ( ex -

autos ).

Consumer Price Index (CPI) Because the monthly CPI is abenchmark infl ation

indicator, it is one of the most anticipatedreleases by the foreign exchangetrading

community. The CPItakes a basket of common, daily - use consumer products

andcompares price levels from previous years. Two metrics comprisethe CPI

statistics Core CPI (minus food and energy)and chain - weighted CPI.

Producer Price Index (PPI) From a foreign exchange tradingperspective, the

primary role of the monthly PPI, whichis released before the CPI every month, is

essentially as a predictorof the all - important CPI infl ation - indicator. Whereasthe CPI is an index of consumer prices, the PPI is an index ofproducer, or

wholesale, prices. Since consumer prices and producerprices are closely

interrelated, the PPI and CPI are generallyclose refl ections of each other. Because

infl ation and interest rates are so important to the value of theU.S. dollar and

the CPI is perhaps the most accurate indicator


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of infl ation available the PPI is also an important economicindicator because it

is, in turn, an accurate predictor ofthe CPI.

Durable goods The Durable Goods Report is a monthlyreport that provides

data on new orders placed with domesticmanufacturers for delivery of durablegoods. These are defi nedas factory hard goods with a useful life of at least three

years,and generally include higher - pricedproductssuchasautomobiles,appliances,

industrial machinery, computers, and the like.The Durable Goods Report is one of

the economic indicatorsthat paint a picture of the U.S. manufacturing sector,

which isa vital aspect of the economy. Therefore, the report also refl ects

general business demand and confi dence within the entireeconomy. For these

reasons, this indicator can certainly movethe currency markets, especially if the

numbers deviate signifi -cantly from the expected consensus numbers (more on

consensuswill be discussed later in this chapter).

Industrial production The Industrial Production Report isa monthly measure of

the percentage change in manufacturingand factory production. Like the Durable

Goods Report,the Industrial Production Report is important because it provides

information on the vital manufacturing sector.

Purchasing Managers Index (PMI) The Institute for SupplyManagement (ISM),

a non profi t group, maintains the PMI andissues monthly releases based upon

this index. The PMI is acomposite index of the manufacturing situation thatincludes:new orders, production level, employment, supplier deliverytimes, and

inventories. Data for this index, which is essentiallya sentiment indicator for the

national manufacturing sector,are obtained through surveys of purchasing

managers.

Employment Cost Index (ECI) The ECI is a quarterly reportreleased by the

Bureau of Labor Statistics (BLS). This report measureschanges in payroll

compensation costs for nonfarm industries,as well as state and local governments

(but excludes federalgovernment).

Housing starts/existing home sales Together, Housing Starts(New Residential

Construction Report) and the ExistingHome Sales Report provide a solid picture of

the U.S. housingsituation. Housing starts is issued monthly by the U.S.Census

Bureau.


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Trade balance The monthly Trade Balance Report is important to foreign

exchange traders because it has become an indicator of U.S. economic health, as

well as U.S. economic standing in relation to foreign economies. The nominal

trade deficit data, which represents the difference in monetary value betweenexports and imports, is probably the most watch ed and anticipated aspect of the

Trade Balance Report.

Personal income and outlays The Personal Income and Outlays Report is a

monthly release by the Bureau of Economic Analysis (BEA). Personal income is the

amount of income received by individuals from all sources, especially wages and

salaries.

Federal Open Market Committee (FOMC) rate decisionsAs is evident fromearlier in this chapter, interest rates are a major determinant of currency value.

An FOMC rate decisionis not as much of an economic data indicator as the others

described in this section. Rather, it is a market - movingannouncement resulting

from an all - important meeting oninterest rates, infl ation, and the economy by

the top Fed boardmembers and bank presidents in the country. The FOMC,

which currently has eight regularly scheduled meetings peryear, is a major

element of the Federal Reserve System, andit serves as the primary director of

U.S. monetary policy. Centralbanks play different roles within their

respectiveeconomies,determined both by conception and tradition. TheEuropean Central Bank has a specifi c mandate to protectagainst infl ation

economic growth is secondary.The American Federal Reserve s role is to

promote economicgrowth and jobs, as well as to watch against infl ation. The

value of a nation s currency is also directlyaffected by the comparative strength

and weakness ofa country s economy in relation to those of its trading

partners. The stronger economy, that with the higher GDPgrowth, lower infl

ation, greater productivity, political stabilityand a host of other factors will, over

time, have thestronger currency. It is these fundamental factors, in conjunction

with central bank interest rate cycles, which producethe long - lasting price trendstypical of the currencymarkets. Exchange rates tend to focus on one aspect of a

currencyits use as a medium of exchange. The U.S.economy is currently 22% of

world GDP; it was once 50%.Modern industrial capitalism is spreading to new and

everlargersections of the world. Since World War II the U.S.

percentage of the world economy has steadily diminished


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as other national economies have grown at faster rates.Over time that reduction

has decreased the demand forthe dollar as an agent of exchange. But currencies

alsoact as a long term store of value. Any foreign investor ina country is also an

investor in that country s currency.

GDP is used for assessing economicgrowth, CPI for providing indications of infl

ation, and the Non -Farm Payrolls report for evaluating the employment situation.

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Fundamental Indicators