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Trader's Corner

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From a daytraders point of view we have to be very aware of the economic reports that are due to be released throughout the day. Some reports may have no impact what so ever yet others will move the market in ways that make you wonder just who is driving. Then some reports that don't usually make an impact can all of a sudden move the market because the information has been perceived as bullish or bearish. You just never know so it is always prudent to step aside from trading until the waters calm.

But from a longer-term investors point of view you really don't care how the market reacts to reports intraday you only care about the long term affects the information my have on the market.

Following is a list of some of the more important economic reports traders and investor alike will typically monitor.

GDP (Gross Domestic Product)

Put out by the Bureau of Economic Analysis, the GDP is the broadest measure of the health of the US economy. Real GDP is defined as the output of goods and services produced by labor and property located in the United States. GDP is an important number to watch because it provides the greatest detail of all sectors and reflects income as well as expenditure flows. Sector coverage includes durable and nondurable goods, structures, and services.

Because of the detail available in the GDP reports, it provides the single most encompassing picture of economic activity available along with estimates of output based on both demand and supply. Then combined with employment data, GDP data gives an important measure of productivity growth.

GDP is released at 8:30 EST approximately one month after the end of each quarter.

ISM Index

The Institute of Supply Management surveys 300 purchasing managers in 20 different industries (weighted according to their contribution to GDP) across the country on their new orders, production, delivery times, backlogs, inventories, prices, employment, export orders and import orders. They put the data together in a monthly composite called the ISM index.

This index provides very timely information on manufacturing activity so has become a leading indicator of economic activity and is perceived as a good indicator of inflationary pressures.

Index values above 50 indicate an expanding economy, while values below 50 indicate an economy in contraction.

Another part of the ISM is the ISM Services Index or sometimes called ISM Non-Manufacturing Index that is released 2 days after the ISM Index. This index is a survey of firms in the service sector.

ISM Index and ISM Service Index for the previous month are both released at 10:00EST the first week of the current month.

CPI (Consumer Price Index)

Put out by the Bureau of Labor Statistics, the CPI is the difference in price from one month to the next for a fixed basket of consumer good and services. It is used as a common measure of inflation because economists can compare the cost of this basket of consumer products to what they cost last month or a last year. The "Core CPI" doesn't include food and energy prices.

Economic theory states that inflation increases when supply cannot keep up with demand, which usually occurs at or near the peak of the business cycle and when the unemployment rate is low. Therefore a rising CPI can indicates increasing inflation or a falling CPI can shows that supply is keeping up with demand and inflation is at bay.

Since the CPI is the most widely used measure of inflation, it has become an indicator of the effectiveness of government policy.

CPI is released at 8:30 EST around the 15th of the month for the previous month's data.

PPI (Producer Price Index)

Put out by the Bureau of Labor Statistics, the PPI is a measure of the price changes in different types of goods at various stages in the production process. It tracks price changes for most industries in the country including agriculture, electricity and natural gas, forestry, fisheries, manufacturing and mining.

The PPI is considered a good indicator and forecasting tool for future inflation as higher prices for crude oil and intermediate-type goods usually precede higher prices for finished goods. Therefore, a rising PPI or a consensus forecast for a higher PPI might precede higher interest rates (especially longer-term rates), which in turn can lead to declining stock prices. Please keep in mind that the PPI is only for domestic production of physical commodities and does take into account inflation sources such as imported goods.

It is worthwhile to follow the PPI because it is a good indicator of wholesale and commodity price pressure and can predict changes in the CPI.

PPI data for the previous month is released at 8:30 EST during the 2nd week of the current month.

Employment Situatione

Put out by the Bureau of Labor Statistics, the Employment Situation report is a timely measure of the current state of the economy and is probably the most widely watched report in the financial markets today. The more people who work and the more money they make, the more money they spend, which will increase the demand for goods and services.

This report includes employment data, change in average hourly earnings, change in aggregate hours worked and the change in the unemployment rate, things the Fed watches closely when setting the Fed Funds Rate.

Previous month's data is released at 8:30EST the first Friday of the current month.

ECI (Employment Cost Index)

Released by the Bureau of Labor Statistics, the ECI is also a widely followed report in economic circles. The ECI measures changes in labor costs (including salaries, wages and fringe benefits) and gauges underlying trends in payrolls as a cost of production. It is especially useful in analyzing the relationships between productivity and inflation.

Look for changes in the growth rate of the index - a higher rate indicates a potential inflation and a lower rate may signal stalling growth.

The report is released at 8:30 EST in the last week of the month after a quarter.

Retail sales

Put out by the Bureau of Census, Retail Sales (or Monthly Advance Retail Trade Survey (MARTS) is the timeliest report of consumer spending patterns excluding any type of services. It is regarded as one of the more important reports because it is timely, although a little short on exactness. Just like the CPI, a rising retail sales number may indicate that demand is about to outstrip supply and that will lead to higher inflation. However, since the data doesn't include services but does include gas, cars and food, it is very volatile and subject to large seasonal changes.

It is released at 8:30 EST around the 14th of the month for the previous month.

Housing Starts

Put out by the Bureau of Census, Housing Starts is a monthly measure of current residential construction activity.

Housing Starts is a good indication of the current trends within this industry and is therefore a good indicator of consumer optimism, since most people will not start building a new home if their economic future is bleak.

It is released at 8:30 EST around the 16th for the previous month.

University of Michigan Consumer Sentiment Survey

Since consumer spending makes up roughly two-thirds of all economic output it is important to the health of the economy and therefore important to measure consumer confidence. Declining confidence will usually lead to weaker consumer spending and increasing confidence will usually lead to stronger consumer spending.

University of Michigan Consumer Sentiment Survey measures consumer confidence from a telephone survey of 500 consumers each month. Each month 60% of the responses are from new interviewees and 40% are interviewed for a 2nd time.

The index is fashioned to show the consumer's present situation and also expectations for the future. Strong numbers from the expectations indicator show that consumers may be more willing to spend in the future but weak expectations may be a harbinger of weaker spending and a slowing economy.

The preliminary report is released at 10:00EST the 2nd Friday of the month and is based on 1/2 the sample while the final release, the last Friday of the month, is from the whole sample.

Jobless Claims

This weekly report released by U.S. Department of Labor is the number of initial claims and the number of continuing claims made for unemployment insurance. It can be volatile because of its frequency and can be skewed by holidays and natural disasters so it is usually smoothed by a four week moving average.

Jobless Claims is released each Thursday morning at 8:30EST.

So what do we do when these numbers are released? Most of the numbers or the reports will not make a huge difference to the market but the ones you should watch are the CPI, PPI, Employment Situation, ECI and GDP. My suggestion is to know when these reports are due and, if daytrading, stand aside until the dust settles from their release. Let the smart money (not saying your money isn't smart, just not as smart) make the decision. Watch the S&P and Nasdaq futures to see if the news was positive or negative, then trade accordingly.

Remember plan your trade and trade your plan

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