Our StarMine research team examines the five most impactful indicators of economic data surprises in the US on foreign exchange (FX) rates, government bond prices and equity prices.
- On average, inflation impacts the markets differently than employment. For foreign exchange and fixed income, it has the same directional impact as employment, while in equities, it moves in the opposite direction.
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While there are commonalities among the most impactful indicators for different markets, some differences also exist, like the way inflation affects equities as compared with FX and fixed income.
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The idea that economic data release, which is significantly different from the consensus, can move markets is not new. In this short note we investigate the five most impactful indicators of economic data surprises on FX rates, government bond prices and equity prices. In our study we focus on the US market for the period of 2009 to 2022. For the complete analysis on economic surprises data, including dozens of indicators, read our white paper on “Economic Surprises: What Really Moves the Markets” by Vieira, M., 2023.
Methodology
Among the major currencies, the one mostly affected by economic releases in the US is the Japanese Yen, for this reason, we chose the USD/JPY exchange rate for this impact study on FX. For the impact on bond prices, we select the US 10-year government bond and for the impact on equity prices we choose the highly liquid S&P 500 E-Mini index.
We use one-minute frequency data, and the impact is calculated on a five-minute window around the economic release. As an illustration of market impact, Figure 1 shows the response of USD/JPY to the November 2022 release of US Nonfarm Payroll. Before the actual was released, the consensus in the last poll were 200.0. On 2 December 2022, the actual was released at 8:30 am ET with a value of 263.0, which resulted in an actual surprise of 63.0. The response in the FX market was immediate. The USD/JPY rate jumped from about 134.1 to 135.7 within minutes.
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Figure 1 – USD/JPY as a function of the time on 12/2/2022, obtained from Refinitiv Tick History. US Nonfarm Payrolls were released at 8:30 am ET (13:30 GMT). The value came at 263.0, which was 63.0 higher than expected and caused the large spike in the spot rate at that time.
To study the impact of an indicator in response to an economic surprise, we first calculated the FX rate change in a five-minute window around the indicator release. We then bin the actual surprises into five quintiles and measure the average percentage change in the USD/JPY rate in each quintile of actual surprise. We measure impact by calculating the difference in the average FX rate change between quintile five (most positive surprises) minus quintile one (largest negative surprises). We do similar analysis for the fixed income and equity markets.
The five most impactful indicators
In Table 1, we display the five most impactful indicators for each market and their respective quintile spreads. A positive quintile spread means that the USD/JPY or 10Y US government bond price or the S&P 500 E-Mini will go up with a positive surprise and vice versa. Consistent with the findings of others, we observe that on average for the FX market US Nonfarm Payrolls is the most impactful indicator, followed by Private Payroll and ISM Manufacturing PMI. The larger the employment surprise numbers; the stronger USD becomes with respect to JPY.
When compared with the FX case, seen that by absolute value, the most impactful indicator for fixed income is also US Nonfarm Payroll. However, the sign of the impact is flipped, which means that the higher the employment surprise the lower the bond prices. That is, a larger employment surprise will likely increase inflation pressure, resulting in the Federal Open Market Committee raising interest rates, which will cause a negative impact on the price of bonds.
For equities, we find that the most impactful indicator is Private Payroll, however, its impact is not much larger than Nonfarm Payroll. An interesting observation is that for equity Core CPI mm has a very strong impact, being the fourth most important indicator, but it impacts the equity values in a different direction than employment, which is clearly distinct from what we see in the case of FX and bond prices.
We see that all the different markets share four of the most impactful indicators, which are Nonfarm Payrolls, Private Payrolls, ISM Manufacturing PMI and Core CPI mm. Among the five most impactful indicators we find GDP Advance is more important for FX, Average Earnings mm for fixed income and Retail Sales mm for equity.
Table 1 – The five most impactful indicators for each US market. The numbers in parentheses show the quintile spread value.
Figure 2 shows how the change in FX, bond price or equity index occurs with a surprise in Nonfarm Payroll and Core CPI mm. As a guide to the eye, we added the regression line as a dashed line in black. We have eliminated from the plots for Nonfarm Payroll five values (out of 156 in the study), which we consider outliers, that is large surprises (in absolute value) that happened in 2020 and 2021, leaving only the cases where the surprise is in the interval [-400, 400]. The slopes of the regression lines qualitatively agree with the quintile spread results – that is a positive quintile spread will result in a positive slope and vice-versa.
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Figure 2 – Difference in (a) USD/JPY, (b) US 10-Y government bond price, (c) S&P 500 E-Mini index for Nonfarm Payroll. Difference in (d) USD/JPY, (e) US 10-Y government bond price, (f) S&P 500 E-Mini index for Core CPI mm. Changes are measured in a five-minute window around the actual release time. Sample contains all last polls before a first release, 2009-2022.
In conclusion, we studied the five most impactful indicators for FX (represented by USD/JPY), US 10-year government bond prices and the S&P 500 E-Mini index. Commonalities are found to be the most impactful indicators for the different markets, but some differences also exist, the most interesting being the way inflation affects equity as compared with FX and fixed income. Among the five most impactful indicators, four are common to FX, bond price and equity value.
For a complete analysis on economic surprises, read the full report “Economic Surprises: What Really Moves the Markets”, by Vieira, M., 2023.
For more information, please contact the StarMine Quantitative Consulting team at starmine.quantconsulting@refinitiv.com to learn about how investors can gain an edge with Refinitiv StarMine SmartEstimate for Economics and the other asset classes.
