Trading never happens in a vacuum. Even with company fundamentals and technical analysis on your side, macroeconomic conditions still shape the market and every security trading in it. That’s why skilled traders don’t silo themselves in price charts. Instead, they stay tapped into the news and pay attention to key economic indicators.
The big three macroeconomic indicators are the GDP, unemployment figures and inflation. Gross Domestic Product is the value of a country’s output through goods and services. Unemployment figures are self-explanatory; they reflect how many people are inactive in the job market. Inflation tracks the rate at which prices rise over time.
Most traders will look at these in relation to the USA and the dollar, though forex and commodity traders may use data on other regions and currencies too. Together, these macroeconomic indicators show a trader if the market is booming or busting.
Learn the market’s biggest economic indicators here, then use them to inform your trade strategy.
What Are Economic Indicators and Why Do Traders Follow Them?
Let’s start with what economic indicators are. Getting a clear view of the economy can be tough, due to how big and multifaceted it is. The best we have are key economic indicators tracked by governments, including policy decisions made by monetary policymakers.
As mentioned, these indicators can tell a trader if the market is expanding or recessing. In a recession, many big-name securities will take a hit. Someone heavily invested in tech, for example, wants to pay attention to indicators and get out before there’s blood in the market. Traders, especially forex traders, use economic calendars to stay informed.
Economic indicators can be leading, lagging or coincident. Leading economic indicators are ahead of the market. They signal something coming in the future. Lagging economic indicators are the opposite; they confirm and inform on trends that have already started or are ongoing in the market.
Coincident indicators are about what the economy is doing right now. They are snapshots used to confirm if leading indicator predictions played out, and provide accurate numbers on industrial production, personal spending and other metrics regarding the public.
That brings us to an important point. With each indicator, there are predictions, expectations and then the final figures that come in. What’s in traders’ heads is just as important as the raw data, since price charts are a reflection of the market’s psychological reaction to a security and the market as a whole.
For example, when the Fed Chair steps up to announce interest rate changes, their tone during forward guidance matters. The way they speak and predict the short-term future economy moves the market, sometimes more than the rate change does.
GDP Explained: What It Tells Traders About the Economy
Of all macroeconomic indicators, the GDP is widely considered the most comprehensive. It looks at the output of a whole nation and uses that as a yardstick to see if its economy is growing or contracting. It’s a timely coincident indicator that gives us a low-resolution look at the economy, but in sufficient detail to show how it is and where it is headed.
It’s that last part that really impacts the stock market. Share price often reflects holders’ expectations of what a company will do in the future. While some companies get by fine during a technical market recession, nobody wants to get trapped in a poor investment.
So, if the GDP slumps and a recession looms, most of the market will turn red. It’ll also trigger slashed interest rates, making local currencies weaker in relation to the dollar. Stock indices, as a curation of America’s leading companies, would also suffer.
Regarding trader confidence, their skittishness is justified. Shrinking economic activity will hurt most companies' profitability. Less profit means fewer shareholder returns, which then means selling, which then slides the share price downward.
When crunching the numbers, you may see GDP per capita as a metric. This is less about the economy as a whole and more about output per person. While it’s a great tool for gauging standard of living and adjusting fiscal policy, it’s less important than the total GDP figure in terms of market impact.
How Inflation and Unemployment Influence Financial Markets
Besides the GDP, the inflation rate and unemployment figures are key macroeconomic indicators. They give us insight into how banks and the general public are doing in the current economy.
Inflation rates are measured by the Consumer Price Index (CPI) and included in some GDP analysis too. With inflation, the aim is to keep it down to prevent unreasonable pricing that stagnates the economy.
Central banks work to keep it down, taking measures like selling treasury bills, which boosts interest rates. That, in turn, stymies borrowing and investment. Stock indices like the FTSE 100, the US 500 and European indices like the Germany 40 suffer. Put simply, high inflation rates can cause a top-down cascade that harms the investment markets.
High inflation harms bond market pricing too, driving yields up and making investors look elsewhere. The reverse happens in the forex market, where inflation can strengthen dollar pairings with the GBP and EUR.
Unemployment analysis instead looks at the bottom-up causes of economic stagnation. That is, it logically assumes that a booming economy will have more people working and more entrepreneurs taking risks, all providing more GDP output. So, if an economy has a lot of unemployment, it is likely stagnating if not recessing.
AI and automation are reshaping some industries, making unemployment figures muddier than in the past. Nevertheless, the fact remains that, even with automation decoupling some forms of labour from growth, the economy would be even stronger if more people were gainfully employed.
High unemployment is actually bullish for the bond prices, as they are the safer alternative to market investment. The same can be said for safe-haven commodities like gold.
Savvy traders watch GDP, inflation and unemployment all at the same time, because they are the main macroeconomic indicators. That way, they get a three-dimensional view of the economy and can better anticipate how the market will react to each new data drop.
How Traders Use Macroeconomic Indicators in Market Analysis
The major macroeconomic indicators help traders grasp market conditions, but knowledge alone won’t bring profit. With that goal in mind, traders factor key macroeconomic indicators into their technical analysis.
Just like indicators on a chart, certainty comes from seeing multiple signs all saying the same thing. It’s why traders should look at all three economic indicators and look for confluence on charts that move when macroeconomic announcements happen. This is covered by our intro to fundamental analysis.
For an example, assume that a currency pair like the EUR/GBP is trending upwards. Support levels hold well, then strong GDP reports come out of Europe. This confirms the trend you’re seeing on chart. It could even encourage further buying and potential breakout of the local resistance.
If the GDP report was bearish for the Eurozone, then the fear of interest rates would kick in. It would challenge the trend, threatening its upward momentum. On seeing the report, you would have a chance to get out before the trend breaks.
Since macroeconomic announcements can be binary events, traders often prepare before the announcement happens. This involves mapping local support and resistance levels, establishing a moving average and looking for analyst expectation for the coming announcement.
They then model both scenarios. If the news is bullish, they’ll mark out support areas where they may buy in. If bearish, they identify resistance levels that could set up a short trade. They don’t hope for an outcome and marry their trading strategy to it, they trade based on what the announcement is.
Economic Indicators FAQs for Beginners
Does Falling Inflation Result in Lower Consumer Prices?
No, note that when we say ‘inflation,’ it is the rate of inflation. This means the reported figures are additive to the inflation that occurred last month and the months before. Slower inflation is bullish, but does not translate to a direct cool off in consumer pricing.
How Are Unemployment Figures Measured?
Unemployment figures are gathered by the government, notably the Bureau of Labor Statistics (BLS) in the USA and the Office of National Statistics (ONS) in the UK. The government is often the best-equipped to take citizen data and use it to calculate unemployment estimates.
The BLS provides a rolling month-by-month unemployment estimate. It is informed by the Current Population Survey sampling approximately 100,000+ individuals across 2,000 areas, then extrapolates.
What Are the Other Macroeconomic Indicators?
GDP, inflation and unemployment are the big three, but there are other macroeconomic indicators. For example, the real estate market, interest rates and specific manufacturing stats can all shape the economy and specific investments.
The big three are most cited and tracked because they provide a holistic view of the economy for most traders, without demanding intense study.
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