What are the key macroeconomic indicators to watch?

• What are macroeconomic indicators?
• Why are macro indicators important for traders?
• Top 11 macroeconomic indicators to watch
• What are they key economic indicators in the UK?
• What are they key economic indicators in the US?
• What are the key economic indicators in Europe?
• What are the key economic indicators in Asia?
• What are the key economic indicators in Australia?
• Macroeconomic indicators summed up

What are macroeconomic indicators?

Macroeconomic indicators are statistics or data readings that reflect the economic circumstances of a particular country, region or sector. They are used by analysts and governments to assess the current and future health of the economy and financial markets.

Macroeconomic indicators will vary in their meaning and the impact that they have on the economy, but broadly speaking there are two main types of indicator.

1. Leading indicators, which forecast where an economy might be heading. They are often used by governments to implement policies because they represent the first phase of a new economic cycle. These include the yield curve, interest rates and share prices.
2. Lagging indicators, which reflect an economy’s historical performance and only change after a trend has been established. They are used to confirm a trend is underway. These include gross domestic product (GDP), inflation and employment figures.

There is also the category of coincident indicators, but these are generally grouped in with lagging indicators as they either happen at the same time or after an economic shift.

Why are macro indicators important for traders?

Macroeconomic indicators are important to any trader because they can have a significant influence on market movements. This is why most fundamental analysis will incorporate macroeconomic indicators.

There is no way to be certain that these indicators are reliable on their own, but they do have a role in shaping the economy. Even if these indicators just influence other traders to open and close positions, this can be enough to create volatility in the market.
Market participants will be keeping an eye on analysts’ predictions of the data ahead of their release. The bigger the difference between the analysts’ predictions and the actual figure, the more volatility can be expected in financial markets – as positions are adjusted to reflect the actual figure.

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Specific data sets have more influence in different countries, so it is important to focus on different macroeconomic indicators depending on which asset you are trading. For example, if you were looking at a British company, or the FTSE 100 you would need to look at the macroeconomic indicators that impact the UK .

Most macroeconomic releases happen on specific dates, which means that traders and investors can prepare for their release and the subsequent market volatility.

To help you prepare, visit IG’s economic calendar.

Top 11 macroeconomic indicators to watch

The best macroeconomic indicator to watch will heavily depend on your personal preferences, what positions you are taking and which country your portfolio is focused on. However, there are some very common indicators that most traders and investors will keep an eye on.

For simplicity’s sake, we have split these out into leading and lagging indicators.

Top leading indicators:

1. The stock market
2. House prices
3. Bond yields
4. Production and manufacturing statistics
5. Retail sales
6. Interest rates

Top lagging indicators:

7. GDP growth rates
8. The Consumer Price Index (CPI) and inflation
9. Currency strength and stability
10. Labour market statistics
11. Commodity prices

First, let's look at the leading indicators:

Stock market

The stock market is considered a good predictive indicator of economic health, because market participants spend their time assessing the health of companies and the economy, so are well placed to judge future growth.

A rise in the stock market indicates confidence in the future of businesses, which could lead to economic growth. While a decline in the stock market could mean that investors are taking their money out of shares and retreating to safe-haven assets.

There are some inherent issues with relying on the stock market as an economic indicator, mainly that the prices are often based on speculation rather than the true value of a company. This is why stock prices can be over- and under-valued. The stock market has also experienced significant bubbles ahead of market crashes, which can create a false sense of optimism about the state of the economy. This happens when traders and investors ignore other macroeconomic indicators and get swept along in the bullish market sentiment.

There are so many factors that impact share prices, so it’s important to use both technical and fundamental analysis to have an idea of future trends in the stock market.

Learn how to trade stocks

House prices and the real estate market

The housing market is widely considered a leading indicator, because the information can inform the state of the economy months in advance.

A decline in housing prices suggests that the number of houses exceeds the amount of people looking to buy. This could be because prices are inflated, or people simply cannot afford to buy. When the housing sector weakens, the entire economy feels it. The decline can have an impact on homeowner wealth, jobs in the construction sector and taxes, and can also force homeowners into foreclosure – the name given to the process of lenders seeking to recover the mortgage loans from borrowers.

The 2008 recession is a prime example of the impact the housing market has on the economy as a whole. The subprime mortgage crisis didn’t remain sealed inside the real estate market, and was instead an early symptom of what would become the global financial crisis.

The number of building permits can be a leading indicator of economic health, because companies will apply for these permits at least six months before they start construction. If new projects start, this is seen as an indication that these companies expect demand for homes to rise. If house construction starts to fall, then builders are more pessimistic about the future of the market.

Learn how to short the housing market and REITs

Bond yields

The bond market is thought to be a good leading indicator, but it is important to note that the entire market is just based on investors’ and traders’ expectations of future economic circumstances. So, perhaps rather than it being considered a leading indicator of what the economy will do, it is a gauge of market expectations.

Find out what government bonds are

The best way to use bonds is by looking at the yield curve. A bond’s yield is the income that a trader can expect to receive in return for buying and holding a bond. The yield curve is a line plotted on a chart that shows the yields of bonds with equal credit quality but differing maturity dates – the graph should, in theory, slope upward, as the yields are higher for bonds with longer maturities.

The performance of shorter-term bonds (those with maturities of up to two years) are directly impacted by central bank decisions and interest rate expectations. While the performance of longer-term bonds (those with maturities of longer than two years) are impacted by interest rates but also factors like inflation and economic growth, which can take longer to come into effect.

When these influences come into play, the shape of the yield curve can shift. It is these changes that analysts use to predict the economic outlook.

When the economy is growing, a positive upturn can be expected as a result of higher inflation. However, longer-duration bonds become riskier as there is increasing chance of rising interest rates. This means that bond investors will start to demand higher yields for lengthier maturities, resulting in long-term bond yields rising faster than short-term – producing a steep yield curve.

When the economic future becomes uncertain, the yield curve flattens. This is because short-term bond yields rise faster than long-term, as investors become indifferent to yields produced across all maturities and will accept the same for any bond.

If the yield curve becomes inverted – when short-term bonds yield more than long-term bonds – this can be seen as a sign that investors expect economic growth to slow sharply while inflation is low, and they therefore expect central banks to cut interest rates.

Learn how to trade government bonds

Production and manufacturing statistics

Production and manufacturing statistics can be one of the easiest and quickest ways to get leading data on the state of the economy. An increase in production and manufacturing outputs tends to have a positive impact on gross domestic product (GDP) figures, which is seen as a sign of increased consumption and positive economic growth.

A change in production levels can also have an effect on employment rates. The number of manufacturing jobs available can tell us a lot about how confident businesses are in their own expansion, and the economy. If there are a significant number of jobs available, companies might have an excess of orders they need to fill. But when they stop hiring, it means they are cutting back ready for a period of decline.

However, it is important to look at inventory levels and retail sales too. High inventory levels can suggest that consumer demand is up, but it can also indicate that produced goods are not leaving warehouses.

Retail sales

Retail sales is the data that monitors all purchases of finished goods and services by consumers and business. It is incredibly important as consumerism accounts for a large portion of economic activity.

In general, increasing retail sales is an indication that the economy is improving. If consumers are confident in their economic circumstances and the future of their situation, they will continue to buy products and fork out money on items that aren’t necessities. This causes levels of manufacturing to rise in line with demand and boosts GDP. It can also have a direct impact on the share prices of the companies involved in creating consumer ‘wants’. These shares are known as cyclical stocks.

However, when consumers start to feel uncertain about their economic future, they will stop buying unnecessary items and restrict their spending. During these periods, defensive stocks – those of companies involved in producing consumer necessities like food and utilities – will tend to outperform the market. To combat the decline in spending, governments often implement tax reductions in order to give consumers more money and boost spending.

However, retail sales alone don’t necessarily provide an accurate picture of public spending. For example, it could be the case that people are taking out loans in order to continue spending. Although this would show continued high retail sales, but the debt levels would indicate an impending recession.

Interest rates

There are arguments for interest rates as both leading and lagging. They are lagging in the sense that the decision to increase or decrease rates is made by central banks after an economic event or market movement has already occurred. However, they are also leading because once the decision has been made, there is a significant likelihood of the economy changing to reflect the new rate.

For example, during periods of health, when there is high consumer spending and high rates of inflation, central banks can be expected to raise interest rates to stop the economy growing too quickly. This decision confirms growth. However, the new rates mean that banks will have to pay a higher rate to obtain money, they will in turn increase the cost of borrowing for consumers. This makes consumers more reluctant to borrow money and discourages spending. The decisions made by central banks will have a significant knock-on effect to banks, consumers and business all around the world.

Learn more about the effects of rising interest rates

On the other hand, if the economy is stagnant, analysts will expect central banks to lower interest rates to boost spending. The decision confirms the economic situation is gloomy but is an indication that the cost of borrowing will soon go down, spending will increase, and the economy will start to grow.

Take a position on interest rates

Now let’s look at some lagging indicators:

GDP growth

Gross domestic product (GDP) is the monetary value of all goods and services produced in a country. The data is widely used to compare the differences between two economies and forecast their growth.

When GDP increases, it can have a knock-on effect to other indicators on this list, such as employment rates, as companies take on more employees and increase manufacturing.

If a country has a consistent GDP growth rate, it is a good sign that the economy is stable. However, rapidly growing GDP rates are often met with criticism. Some analysts argue that is only too easy to manipulate GDP figures, with programmes such as quantitative easing or excessive government spending. For example, up until 2019, India was heralded as the fastest-growing major economy with annual GDP rates of 7% but, after finding a flaw in the measuring process between 2011-2017, it appears this rate was actually 4.5%.

As a lagging indicator, there is only so much GDP can tell traders and investors. However, the theory goes that if the GDP rate declines two quarters in a row, then the economy is entering a downturn or recession.

Inflation rates

Inflation is the sustained increase in the price of goods and services in a country. It is a lagging indicator, as it is the result of economic growth or decline.

During periods of economic growth, there is likely to be an increase in inflation. A high rate of inflation can have a severe impact on the price of a country’s currency, decreasing its purchasing power and making it more expensive for consumers to buy products – at least nominally. It can also have an impact on other macroeconomic indicators, as it can lead to decreases in employment and GDP growth. High inflation rates lead to a rising of interest rates, as governments attempt to get prices under control.

During periods of economic downturn, there can be declining levels or inflation, or even ‘deflation’ – when inflation falls below 0%. This might sound positive, but in fact it is confirmation that consumers have reduced their spending. This is often accompanied by reduced money supply, declining retail sales, and rising unemployment rates.

Currency strength and stability

A country’s currency is a reflection of the health and stability of its economy because a currency’s price is based on how buyers and sellers perceive its value. It is a lagging indicator because the currency’s value will change to reflect the political and economic circumstances of the country.

Learn how to trade forex

When there is significant uncertainty or change, the instability plays out across the nation’s currency and the value can change rapidly – known as market volatility.

A strong economy is viewed positively by investors, who will pay more for the currency. In turn, a strong currency boosts the economy, due to its increased purchasing power. The impact of increasing currency prices depends on whether a country is a net importer or exporter. For example, if a country is a net exporter, although goods can be sold at higher foreign prices, importers might not want to pay these increased prices. Whereas if a country is a net importer, it becomes cheaper to buy foreign goods.

A weak economy discourages investment, which causes the currency to decline in value. This, in turn, lowers the price of exports, which – although less positive for domestic companies – can make prices more competitive on a global stage. It also makes imports more expensive as the currency can buy less, meaning the cost or foreign goods for companies and consumers goes up. However, there are also advantages to a weakened currency – it encourages tourism and the demand for domestic goods.

Labour market statistics

Perhaps the most useful lagging indicator is unemployment rate. If the unemployment rate increases month-on-month over a period of time, it tends to indicate that the overall economy has been declining in health. If employment rates fall, it means that businesses have finally given up hope that the situation will improve and have started to lay off their workers.

Even once the economy is considered to be back on track, unemployment rates might not decline, because employers will always wait until they are sure the economy is growing before starting to employ new workers.

Commodity prices

Commodity prices are considered good macroeconomic indicators because their market prices often change before other lagging indicators.

An economy-wide increase in demand for a commodities, such as wood, iron and oil, can be seen as a sign that an economy is growing. These supplies are often needed for building infrastructure, and so the largest importers of commodities are emerging market economies. When demand for these commodities decreases, it is a symptom that an economy is contracting and building projects are ceasing.

Learn more about commodity trading

Certain commodities, such as gold, will increase in price during economic downturns. Gold is considered a safe-haven asset, so investors consider it a store of value during periods of economic uncertainty. If the price of gold rises, it can be a sign that the economy is slowing, and investors are seeking out more stability. If the price of gold declines, it is a sign that investors are moving their money into higher-risk assets.

What are they key economic indicators in the UK?

Below are some key UK economic indicators and the frequency of their release.

What are they key economic indicators in the US?

Below are some key US economic indicators and the frequency of their release.

What are they key economic indicators in the EU?

Below are some key Eurozone economic indicators and the frequency of their release.

What are they key economic indicators in Asia?

Below are some key indicators of GDP and interest rates in Hong Kong, India, Japan and Singapore.

What are they key economic indicators in Australia?

Below are some key Australian economic indicators and the frequency of their release.

Macroeconomic indicators summed up

• Macroeconomic indicators are statistics or data readings that reflect the economic circumstances of a particular country, region or sector
• Macroeconomic indicators will vary in their meaning and the impact that they have on the economy, but broadly speaking the two types are leading and lagging indicators
• The most widely used indicators are those published by respected sources, such as governments, supranational bodies and non-governmental organisations (NGOs)
• Macroeconomic indicators are important to any trader because they can have a significant influence on market movements
• Most macroeconomic releases happen on specific dates, which means that traders and investors can prepare for their release and the subsequent market volatility
• You can use IG’s economic calendar to prepare for data releases
• Popular leading macroeconomic indicators to watch include the stock market, house prices, bond yields, production and manufacturing statistics, retails sales and interest rates
• Popular lagging indicators include GDP growth rates, the Consumer Price Index (CPI), national currency strength, labour market statistics and commodity prices
• The importance of data can vary from country to country, so it is important to know key indicators by region

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