5. What causes the markets to move?
Consumer Price Index
The Consumer Price Index (CPI) is a
measure of the average level of
prices of a fixed basket of goods
and services purchased by consumers.
The monthly reported changes in CPI
are widely followed as an inflation
indicator. The CPI is a primary
inflation indicator because consumer
spending accounts for nearly
two-thirds of economic activity.
Often, the CPI is followed but
excludes the price of food and
energy as these items are generally
much more volatile than the rest of
the CPI and can obscure the more
important underlying trend.
Rising consumer price inflation is
normally associated with the
expectation of higher short term
interest rates and may therefore be
supportive for a currency in the
short term. Nevertheless, a longer
term inflation problem will
eventually undermine confidence in
the currency and weakness will
follow.
Producer Price Index
The Producer Price Index (PPI) is a
measure of the average level of
prices of a fixed basket of goods
received in primary markets by
producers. The monthly PPI reports
are widely followed as an indication
of commodity inflation. The PPI is
considered important because it
accounts for price changes
throughout the manufacturing sector.
A rising PPI is normally expected to
lead to higher consumer price
inflation and thereby to potentially
higher short-term interest rates.
Higher rates will often have a short
term positive impact on a currency,
although significant inflationary
pressure will often lead to an
undermining of the confidence in the
currency involved.
Payroll employment is a measure of the number of people being
paid as employees by non-farm business establishments and units
of government. Monthly changes in payroll employment reflect the
net number of new jobs created or lost during the month and
changes are widely followed as an important indicator of
economic activity. Payroll employment is one of the primary
monthly indicators of aggregate economic activity because it
encompasses every major sector of the economy. It is also useful
to examine trends in job creation in several industry categories
because the aggregate data can mask significant deviations in
underlying industry trends.
Large increases in payroll employment are seen as signs of
strong economic activity that could eventually lead to higher
interest rates that are supportive of the currency at least in
the short term. If, however, inflationary pressures are seen as
building, this may undermine the longer term confidence in the
currency.
Durable Goods Orders are a measure of the new orders placed with
domestic manufacturers for immediate and future delivery of
factory hard goods. Monthly percent changes reflect the rate of
change of such orders. Durable Goods Orders are a major
indicator of manufacturing sector trends because most industrial
production is done to order. Often, the indicator is followed
but excludes Defence and Transportation orders because these are
generally much more volatile than the rest of the orders and can
obscure the more important underlying trend.
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