One of the biggest challenges for new traders is knowing which economic releases deserve the most attention. Economic calendars typically classify indicators as low, medium or high impact, but these labels can be misleading. A release marked as high impact can sometimes pass without moving markets much, while a low impact indicator can trigger a significant reaction.
The impact of economic data depends not only on the indicator itself, but also on the current economic environment, central bank focus and what the market has already priced in.
Why impact ratings on calendars are useless
Economic calendars generally assign impact ratings based on how much volatility an indicator has historically generated. However, historical volatility does not account for current context.
For example, US CPI is usually considered a high impact release because inflation plays a major role in the Federal Reserve’s interest rate decisions. But if inflation has been broadly stable and the Fed has made it clear that it is more concerned about the labour market, the same inflation report might generate a relatively muted reaction.
Conversely, a weaker than expected employment report could trigger a significant market move if traders are increasingly concerned about a deteriorating labour market and are looking for confirmation that the Fed will cut rates.
This is why traders should avoid relying exclusively on economic calendar labels. The question they should ask is: Which economic data could change expectations about future central bank decisions?
How to identify the economic data that matters
The best way to identify the most important economic releases is to understand what central banks are currently focusing on. Central banks make monetary policy decisions based on their assessment of inflation, economic growth, employment and financial conditions. However, the relative importance of these factors changes over time.
If inflation remains stubbornly high, policymakers may emphasize the need for convincing evidence that price pressures are easing before considering rate cuts. In that environment, inflation releases become particularly important because they can change expectations about how long interest rates will remain elevated.
For example, suppose Fed officials repeatedly highlight monthly core inflation as a key input in their decisions. In that case, US Core CPI M/M becomes the single most important release to watch. A reading significantly above consensus could increase expectations for tighter monetary policy, while a downside surprise could lead traders to price in fewer rate hikes or earlier rate cuts.
The market reaction will depend on how much the release changes the expected path of interest rates. A small deviation from consensus may have little impact, while a large surprise can force investors to reassess their outlook more aggressively.
The same principle applies when central banks are focused on employment. If policymakers begin expressing greater concern about a weakening labour market, indicators such as nonfarm payrolls and unemployment can become the main drivers of market volatility. The key is to follow the central bank’s reaction function.
Economic indicators should never be looked at in isolation. Their importance depends on the economic context and the direction in which the economy is moving.
Imagine for example that inflation is too high, while PMIs suggest that economic activity remains strong. This combination can make central banks reluctant to ease monetary policy because demand remains resilient and inflationary pressures may persist.
In this situation, a stronger than expected PMI might not generate a particularly large reaction if the market already expects solid economic growth, unless the PMI surprises signficantly to the upside. A weaker than expected reading, however, could have a much greater impact.
Why? Because it would challenge the prevailing view that the economy is strong enough to sustain elevated interest rates. If growth starts slowing, demand and price pressures could eventually ease, giving the central bank more room to cut rates.
The opposite can also happen. If the economy is weakening and markets are increasingly concerned about recession, a stronger than expected PMI or employment report could trigger a significant reaction by reducing expectations for rate cuts.
The same economic release can therefore produce very different market reactions depending on the prevailing conditions.
Knowing what’s already priced in is key
Even when you identify the right economic indicator, you still need to understand what the market expects before the release. Markets are forward-looking. Prices reflect investors’ expectations about the future, and those expectations are constantly adjusted as new information arrives. As a result, markets generally react not to the data itself, but to how the data compares with what was expected and how it changes the future outlook.
Suppose inflation is expected to remain elevated, and traders have already priced in another interest rate hike. A report that confirms the consensus might not generate much volatility because it provides little new information.
Now imagine that inflation comes in significantly below expectations. This could challenge the assumption that further tightening is necessary, triggering a dovish repricing of interest rate expectations. Bond yields might fall, the currency could weaken and gold could rise, depending on the market context.
The reverse is also true. If markets have become excessively dovish and are pricing in several rate cuts, an inflation surprise to the upside could trigger a sharp hawkish repricing.
It is also important to consider positioning. If traders are already heavily positioned for a particular outcome, a release that supports that view can produce a limited reaction, or even a reversal, if the result fails to exceed expectations by enough.
This article was written by Giuseppe Dellamotta at investinglive.com.