What is the Economic Calendar?
The economic calendar is the scheduled dates of release of information related to the economy that significantly impacts the financial markets. The financial markets are a news-driven supply and demand vehicle; therefore, the release of significant news or economic events will drive price movements in the market.
Many investors and traders will use the economic calendar to strategically plan their trades and portfolio rebalancing. Economic calendars are available for free or on various databases, such as the Bloomberg Terminal.
Understanding Economic Calendars
The economic calendar includes a schedule of released economic reports and information for specific countries. The countries will release what are known as indicators, which are essentially data points that relate to the economy. The data points are variables that are related to the economic cycle. The types of indicators include:
A lagging indicator is an observable economic variable that changes its direction and movement after the change has occurred in the target variable (economic cycle). Lagging indicators are used to gauge the trend of the overall economy, and investors, businesses, and government entities use them as signals for their strategies and operations.
Some examples of economic lagging indicators are:
- Balance of Trade
- Corporate Earnings
- Consumer Price Index (CPI)
- Gross Domestic Product (GDP)
- Labor Cost per Unit of Output
- Interest Rates
- Unemployment Rate
The shared characteristic between these variables is that the shift in these variables occurs after there has already been a significant shift in the economy. For example, in the 2008 Global Financial Crisis, these indicators did not shift significantly until after the housing market bubble had already crashed.
A leading indicator is an observable economic variable that changes its direction and movement before the change has occurred in the target variable (economic cycle). Leading indicators are used to predict when changes in the economic cycle are going to occur, and to predict other significant changes in the economy. Although leading indicators are not always accurate, they are used by investors, businesses, and government entities to plan their strategies and operations.
Some examples of economic leading indicators are:
- Yield Curve
- Stock Market
- Jobless Claims
- Retail Sales
- Housing Starts
- Purchasing Managers Index (PMI)
- Corporate Capital Expenditures
Users of Economic Calendars
Economic calendars are useful for all participants in the financial markets and regulators. However, they are heavily used by investors and traders. For example, long-term investors will use the indicators to gauge whether or not they should review their asset allocation.
If leading indicators are showing signs of an economic contraction, then an investor may want to reallocate their portfolio towards more low-risk, fixed-income securities. Conversely, if leading indicators show signs of an economic expansion, an investor may want to reallocate their portfolio towards higher-risk equity securities.
Additionally, traders may want to time their entry and exit points with certain investments with the release of economic events. Traders can make bets on the impact or direction of the announcements and attempt to profit by entering certain trades. For example, if a trader anticipates better than expected economic news, the trader can take long positions (buying securities) to benefit from price appreciation.
Conversely, if a trader believes that there will be worse than expected economic news, the trader can take short positions (selling securities). Again, it depends on the efficient market theory, which is essentially the fact that markets are news-driven, and that new information is priced into securities.
Economic Calendar Variations
Most countries adopt their own economic calendars with their respective schedules of economic release dates. The economic calendars are available for free on various financial websites; however, the content and dates on each site may vary.
Most market participants pay heavy attention to the U.S. economic calendar since the U.S. is such a large and influential economy. Major economic events in the country usually exert a significant impact on the global markets as a whole. It is because the United States is the world’s largest economy. It also plays a central role in the global economy with the importance of the U.S. dollar as the de facto foreign currency reserve for all countries.
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