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Key Economic Indicators The Bloomberg site provides a monthly Economic Calendar identifying when each of the reports are released. This calendar in the market data section of the site, allows the viewer to click on different reports and see how the different indicators can affect the economy. The consensus forecast is given for each indicator. An analysis of the data appears in a report below. Each report has an analysis below to assist with interpretation. Key economic indicators (also called market movers) are highlighted. http://www.bloomberg.com/markets/economic-calendar/
Key Economic Indicators Key economic indicators are measurements of different aspects of the US economy that signify strengths and weaknesses. Economic indicators can strongly influence movements in financial markets. However, studying economic indicators can be challenging because:
Key Economic Indicators 2. In a global market, it is important to study not only US economic indicators, but also indicators of other countries, especially industrialized nations such as the United Kingdom, Japan and major Euro-zone countries (i.e. Germany and France). This compounds the number of economic indicators that must be followed.
Indicators 1. Employment • Employment Situation:Released monthly the first Friday of the following month and breaks down the employment situation demographically by industry, sector, and geographic region. The Employment Situation covers more than 500 industries and a few hundred metropolitan areas. The most watched data of the report is the new non-farm payroll which shows how many jobs were created in the previous month outside of the agriculture sector.
Indicators Employment
Indicators New Jobless Claims: The jobless claims report is released every Thursday and it shows the number of individualswho filed for unemployment benefits for the first time. If the number of first-time files decreases, it indicates a positive trend; but if the number of first-time files increases, it indicates a negative Because jobless claims are released weekly, data may be volatile.
Indicators Employment
Indicators 2. Inflation Consumer Price Index (CPI): The CPI is a measure of inflation at the retail level and is released monthly. Itshows the price change for a fixed basket of goods bought by an average working class family. This index is important because it is used to adjust many different contracts that affect living standards (wages, rent, social security benefits).
Indicators • Producer Price Index (PPI):The PPI is a measure of inflation at the wholesale level. The index calculates the price change of the raw materials that go into the basket of finished goods.
Indicators 2. Inflation- continued
Indicators • Core CPI and PPI: The Core CPI and Core PPIremovesfood and energy from the price change calculation. Food and energy are considered the most volatile elements of the indexes. They are removed from the core calculation in order to obtain a more accurate picture of actual price changes occurring in the economy.
Indicators 3. Gross Domestic Product (GDP) Continued GDP= C + I + G + NX C= Consumption I = Investments G= Government Spending NX= Net Exports = Exports-Imports
Indicators 3. Gross Domestic Product-Continued Gross Domestic Product is revised in each of the two months after the initial release. For example, GDP for the first quarter is released in April and revised in May and June. These releases can vary substantially. The three GDP figures below are for the first quarter in 2013. As you can see, the actual GDP changed with each revision from the GDP released in April to the GDP released in June.
Indicators Gross Domestic Product (GDP)- Continued
Indicators 4. Consumer Confidence • Every month, American consumers and households are surveyed regarding their views of the economy and employment
Measures of Consumer Confidence US Consumer Confidence Index: A monthly survey of 5,000 households taken by The Conference Board that provides a measure of how confident consumers are about the economy.
Indicators 5. Housing • Housing Market Index: A monthly report; surveying members of the National Association of Home Builders,that gauges their perceptions of the overall economy and the housing market. This indicator is similar to the Consumer Confidence indictor because it identifies how willing people are to buy homes. A willingness to buy a home shows confidence but an aversion to buy a home indicates consumer uncertainty in the economy. • Other housing indicators are Housing Starts, Building Permits, New Home Sales, and Existing Home Sales.
Fundamental Security Analysis A company’s financial ratios are typically compared to other companies within the same industry. For example, Walgreen's ratios are compared to the ratios of CVS and Rite Aid. This real life depiction comparing the three companies is shown at the end of this section.
Liquidity Ratio: Measuresa company’s ability to pay off debt. Liquidity ratios are important to determining if a company is in a sound financial position and can recover if unexpected events occur in the company or the economy. Current Ratio: The ratio of current assets to current liabilities. It shows a company’s ability to pay off short term debt with its short term assets. A large ratio indicates the company is in a sound position.
2. Quick Ratio: A measure of how well a company can pay off its short term liabilities with its current assets, not including its inventory. The quick ratio excludes inventory because inventory tends to be less liquid, thus difficult to quickly turn into cash even though it is a current asset. Quick Ratio = Current Assets - Inventory Current Liabilities
3. Profitability Ratios: measure how much return a company can generate with either its assets or equity in the business. • Return on Assets: A measurement of how profitable a company is based on their assets. It shows how many dollars of net income are generated per dollar of asset. ROA = Net Income Total Assets • Return on Equity: A measurement of how profitable a company is based on the equity put into the business from the shareholders. It is the ultimate measure of profitability from the shareholders’ perspective. ROE = Net Income Shareholders’ Equity
5. Solvency Ratio: A measurement or measure that shows how well a company is able to cover its long-term liabilities. It takes the company’s after tax net profit and depreciation and divides that by the total liabilities (current and long term).
Example Rite Aid’s Current Ratio is the largest, followed by CVS and then Walgreens. All of the pharmacies have current ratios larger than one meaning they are able to pay off their short term liabilities with their current assets.
Example Quick Ratio: CVS has the largest quick ratio, followed by Rite Aid and then Walgreens Return on Assets. All of the ratios are less than one because of the type of business the companies do. A large portion of their currents assets is inventory and the quick ratio takes out inventory from the calculation.
Example Return on Assets: All three companies have similar ROAs. In comparison to each other, Walgreens has the highest ROA meaning it is more profitable relative to its total assets than CVS and Rite Aid. *Note that a company’s ROAs are generally compared with other companies in the same industry because of the different business structures within industries.
Example Return on Equity: Walgreens and CVS have similar ROEsof 0.12 and 0.10, respectively. This means that the companies are generating about 10-12% return on the shareholders’ equity investments. Rite Aid generated negative net income and negative shareholders’ equity so it is unprofitable.
Example Price to Earnings: Walgreen’s P/E ratio (20.80) is the largest followed by CVS (15.63). Rite Aid has a negative P/E ratio (-7.93). Walgreen’s and CVS’s ratios indicate the investors expect both company’s earnings to increase. Rite Aid’s P/E ratio shows that there is little investor confidence for the company to increase its earnings.
Term Structure is the study of how maturity affects interest rates.
1. Yield Curve: A line that plots interest rates of bonds of similar credit rating but with different maturities. The yield curve is most notably linked with US Government (Treasury) Bonds. The Treasury yield curve is used as a benchmark for determining interest rates for other bonds. Yield curves are more often described by their slope or shape – positively sloped, negatively sloped, or flat.
2. Credit Differentials: Studying two or more bonds with the same maturity but different credit quality to demonstrate how credit quality affects interest rates.
Bonds Example: 10-Year AAA-rated bond vs. 10-Year Junk Bond
Junk Bonds • The junk bond should always have a higher yield than the investment grade bond because of the added risk an investor takes on when buying the bond. However, what is significant is the size of the spread. • A very “wide” spread indicates that investors are demanding significantly higher yields (interest rates) to invest in the lower quality bond. • Conversely, a very “narrow” spread indicates that investors are willing to accept a lower amount of incremental (extra) yield to invest in the lower quality bond. • Typically in a recessionary economy, where consumer confidence is low, investors tend to be more risk adverse. • Consequently, in a strong economic environment, they will demand more incremental yield to invest in the lower quality bond and the spread will widen.
3. International Interest Rate Differential: The spread between US Treasury Bonds and Foreign Government Bonds from other industrialized countries shows the relative attractiveness of one nation’s bonds over another country's bonds.
