Inflation<\/strong> is the most important indicator of the development of economic processes and, for the currency markets<\/strong>, one of the most significant benchmarks.\u00a0Currency traders<\/strong> are observing inflation data<\/strong>.<\/p>\n\n From the perspective of the Forex market<\/strong>, the impact of inflation<\/strong> is naturally perceived through its relationship with interest rates<\/strong>.\u00a0<\/p>\n\n Since inflation<\/strong> changes price levels<\/strong>, it also changes the real returns<\/strong> actually received from the income generated by financial assets.\u00a0<\/p>\n\n This impact is usually measured using real interest rates<\/strong> (\u00a0Real Interest Rates<\/strong>\u00a0), which, unlike conventional nominal interest rates<\/strong> (\u00a0Nominal Interest Rates<\/strong>\u00a0), take into account the depreciation of money that occurs due to the general rise in prices.<\/p>\n\n An increase in inflation<\/strong> reduces the real interest rate<\/strong> since some part must be deducted from the income received, which will go to cover the price increase and does not give any real increase in the benefits (goods or services) received.\u00a0<\/p>\n\n The simplest way to formally account for inflation<\/strong> is to consider the nominal rate<\/strong> I<\/strong> minus the inflation coefficient<\/strong> p<\/em> (also given as a percentage) as the real interest rate<\/strong>,<\/p>\n\n r = i – p<\/strong><\/p>\n\n For obvious reasons<\/strong>, government securities markets<\/strong> (interest rates on such securities are fixed at the time of their issue) are very sensitive to inflation<\/strong>, which can destroy the benefits of investing in such instruments.\u00a0<\/p>\n\n The effect of inflation<\/strong> on the government securities markets<\/strong> is easily transferred to the currency markets<\/strong> closely related to them: the dumping of bonds denominated in a specific currency CRS<\/strong> due to rising inflation<\/strong> will lead to an excess in the cash market in this currency CRS<\/strong> and, consequently, to a fall in it\u2014the exchange rate<\/strong>.<\/p>\n\n In addition<\/strong>, the inflation rate<\/strong> is the most important indicator of the “health” of the economy, and therefore it is carefully monitored by central banks<\/strong>.\u00a0<\/p>\n\n The only way to fight inflation<\/strong> is to raise interest rates<\/strong>.\u00a0Rising rates divert part of the cash from business turnover; as financial assets become more attractive (their profitability grows along with interest rates<\/strong>), loans become more expensive;\u00a0as a result, the amount of money that can be paid for goods and services produced falls, and consequently the rate of price growth also decreases.\u00a0<\/p>\n\n Because of this close relationship with central bank rate decisions<\/strong>, foreign exchange markets<\/strong> closely monitor inflation indicators<\/strong>.<\/p>\n\n Of course<\/strong>, individual deviations in inflation levels<\/strong> (for a month, a quarter) do not cause the reaction of central banks<\/strong> in the form of changes in interest rates<\/strong>;\u00a0central banks<\/strong> follow trends, not individual values.\u00a0<\/p>\n\n For example, low inflation<\/strong> in the early 1990s allowed the FED to keep the discount rate at 3%, which was good for economic recovery.\u00a0<\/p>\n\n But in the end, inflation indicators<\/strong> ceased to be essential benchmarks for the currency markets<\/strong>.\u00a0Since the nominal discount rate<\/strong> was small, and its real version<\/strong> generally reached 0.6%, this meant the markets that only the upward movement of inflation indices<\/strong> made sense.\u00a0<\/p>\n\n The downtrend in the US discount rate was broken only in May 1994 when the FED raised it, along with the federal funds rate, as part of a pre-emptive anti-inflationary measure.\u00a0True, raising rates then could not support the dollar.<\/p>\n\n The main published indicators of inflation<\/strong> are the Consumer Price Index (CPI)<\/strong>, the Producer Price Index (PPI)<\/strong>, and the GDP deflator<\/strong> (\u00a0GDP Implicit Deflator<\/strong>\u00a0).\u00a0Each of them reveals its part of the overall picture of price growth in the economy.<\/p>\n\n It is impossible to correctly understand<\/strong> the meaning of changes in economic indicators and assess their consequences for foreign exchange markets<\/strong> without taking into account the cyclical behavior of the economy.\u00a0<\/p>\n\n It is known that the development of financial processes is cyclical: growth is necessarily accompanied by a recession, followed by recovery and new growth.\u00a0<\/p>\n\n The same change in a specific indicator can have completely different economic meanings (and hence financial consequences), depending on at what stage of the economic cycle it is observed.\u00a0<\/p>\n\n The expected impact of such a change on the exchange rate<\/strong> can be exactly the opposite in these cases since the financial authorities look at the state of the economy and make regulatory decisions taking into account its cyclical behavior.\u00a0Knowledge of concepts<\/strong><\/p>\n\n The economic cycle<\/strong> (Economic Cycle<\/strong>), otherwise called the business cycle<\/strong> (\u00a0Business Cycle<\/strong>\u00a0), is a natural form of development (growth) of the economy.\u00a0<\/p>\n\n\n\n Considering the dynamics of economic development, there are three main phases:<\/p>\n<\/blockquote>\n\n – Recession<\/strong>\u00a0is a decline in business activity, a drop in production, employment, and income, distinguished by the degree of economic decline – crisis and depression;<\/p>\n\n – Recovery<\/strong>\u00a0is the rise in economic activity, the growth of market conditions, the increase in output after its fall, which took place during the recession, to previous levels;<\/p>\n\n – Expansion<\/strong>\u00a0is the continuation of economic growth after the stage of recovery, as a rule, until reaching a new maximum output, exceeding that achieved in the previous cycle.\u00a0<\/p>\n\n The expansion stage can sometimes include several cycles, which, in this case, are called\u00a0growth cycles<\/strong>.<\/p>\n\n Every economic indicator<\/strong> demonstrates cyclical behavior in one way or another.\u00a0<\/p>\n\n It is only necessary to take into account the individual characteristics of the cycles of these indicators to consider their ratios in terms of time parameters and terms of the magnitude of the drops.<\/p>\n\n Depending on the nature of the indicators<\/strong> and their connection with the general economic dynamics, it is customary to single out\u00a0procyclical<\/strong>\u00a0indicators (the course of which coincides with the general direction of economic growth – corporate profits grow on the rise of the economy),\u00a0counter-cyclical<\/strong>\u00a0(which are directed against general growth – unemployment rises when the economy falls) and\u00a0acyclic<\/strong>\u00a0(the behavior of which changes little inside the cycle).\u00a0<\/p>\n\n A brief classification of some indicators by this property is given in the table below.<\/p>\n\n Since indicators<\/strong> are created to identify and take into account the characteristics of precisely\u00a0various<\/em>\u00a0aspects of economic processes, their behavior also has its specifics.\u00a0<\/p>\n\n In particular, it is important to know whether a particular indicator tends to be ahead of the overall trend or if it lags behind the main course of the economic cycle.\u00a0<\/p>\n\n On this basis, the most well-known indicators are classified as shown below.<\/p>\n\n In the United States, there is a special non-governmental research organization, the National Bureau of Economic Research\u00a0(NBER – National Bureau of Economic Research)<\/strong>, which is busy tracking economic cycles and determining their turning points.\u00a0<\/em><\/p>\n\n This is not as easy a task as it might seem since different indicators have their cycles shifted relative to each other in time.\u00a0<\/em><\/p>\n\n It is very important to trace the global economic cycle using them and give its objective characteristics since many participants in economic activity will be guided by this cycle in their business plans.<\/em><\/em><\/p>\n\n According to the NBER method<\/strong>, a recession (recession) begins with a fall in real GDP for two consecutive quarters in a row.\u00a0But in itself, such a fall does not necessarily mean a recession because indicators often deviate from the main trend.<\/p>\n\n \u00a0A large number of other indicators are involved in order to form a general assessment of the trend, which most researchers and practitioners will accept.\u00a0<\/p>\n\n At the same time, not even the values \u200b\u200bof economic indicators themselves (GDP<\/strong>, industrial production<\/strong>, trade balance<\/strong>, etc.) are of the greatest importance, but their changes from month to month, from quarter to quarter, and in the longer term – from year to year.\u00a0It is in these changes that the impact of the economic situation on business results in changes in the mood and activity of producers and consumers is most clearly expressed.<\/p>\n\n There is no convincing general theory of economic cycles<\/strong>, just as there is no consensus on the causes that give rise to them.\u00a0As the main factors that cause economic fluctuations, various economic theories consider, for example:<\/p>\n\n Taking into account such phenomena<\/strong> cannot be a simple matter.\u00a0<\/p>\n\n The main thing that has been well understood for a long time is that cycles are an inevitable phenomenon generated by internal causes that are among the integral driving forces of economic development.\u00a0<\/p>\n\n Therefore, tracking and forecasting the parameters of the cyclical development of the economy in all civilized countries is performed as the most important state function.<\/p>\n\n Gross Domestic Product (GDP)<\/strong> is a general indicator of the amount of value added created over a certain period by all manufacturers operating in the country.\u00a0<\/p>\n\n GDP is a broad indicator of the strength of the economy (or vice versa, its weakness during recessions).\u00a0Its connection with the exchange rate<\/strong> is always obvious and quite direct – the stronger the GDP grows, the stronger the national currency.\u00a0<\/p>\n\n For currency markets<\/strong>, this is one of the main indicators.\u00a0The reaction to the publication of not only the growth indicators of the main economies but also their corrected (updated) values can be quite significant.<\/p>\n\n The definition of GDP<\/strong>, known from macroeconomics textbooks, gives it a double entry for consumption and income components:<\/p>\n\n GDP = C + I + G + NE = PI + PR<\/strong><\/p>\n\n Where<\/strong>\u00a0C<\/strong>\u00a0–\u00a0Consumption<\/strong>, I<\/strong> –\u00a0Investment<\/strong>, G<\/strong> –\u00a0Government Spending<\/strong>, NE<\/strong> –\u00a0Net Exports (Exports – Imports)<\/strong>, PI<\/strong> –\u00a0Personal Income<\/strong>,\u00a0PR<\/strong>\u00a0–\u00a0Profits<\/strong> owners.<\/p>\n\n GDP<\/strong> is calculated both in nominal form (in current prices) and in prices of a fixed period\u00a0(Real GDP)<\/strong>.\u00a0<\/p>\n\n The ratio of nominal GDP to real GDP is\u00a0the GDP deflator (Implicit Price Deflator)<\/strong>; it is also published as one of the inflation indicators<\/strong>.\u00a0<\/p>\n\n In addition to GDP, the Gross National Product (GNP)<\/strong> indicator, which\u00a0is close in meaning to it, is also used, which takes into account the total production of goods and services by residents of a given country, regardless of where they are located, within national borders or abroad.<\/p>\n\n GDP data<\/strong> are released quarterly;\u00a0the usual release time for the US is the 20th of the month following the end of the quarter.\u00a0<\/p>\n\n Over the next two months, revised (revised) values of the indicator are published.\u00a0Half-yearly data may be updated up to three years later.\u00a0<\/p>\n\n When analyzing the dynamics of economic cycles in terms of\u00a0GDP<\/strong>, one should take into account phenomena of very different scales, from very long-term ones, like demographic factors or world wars, to shorter-term causes that cause imbalances in the economy.<\/p>\n\n Industrial Production (IP)<\/strong>\u00a0measures the output of manufacturing plants in industry, extractive industries, and energy supply.<\/p>\n\n \u00a0It is important for the foreign exchange market<\/strong>, as it has a direct impact on all indicators of economic growth and, therefore, is closely related to financial policy.\u00a0<\/p>\n\n The development of IP<\/strong> means the strengthening of the economy as a whole, including the strengthening of the country’s position in the world economy, which should lead to an increase in the competitiveness of the goods of this country on the world market and hence, the growth of its trade balance<\/strong> and the exchange rate<\/strong> of the national currency.<\/p>\n\n The IP index<\/strong> is published monthly around the 15th.<\/p>\n\n Capacity Utilization (CAPU)<\/strong>\u00a0is the ratio of total industrial output to the value of the total productivity (potential output) of industries.\u00a0<\/p>\n\n This indicator is of great importance for the foreign exchange market<\/strong> due to its close connection with the dynamics of the business cycle, thanks to which it becomes an additional benchmark for the market in difficult moments of waiting for changes in the policy of central banks<\/strong>, suggesting possible future decisions of the Central Bank.<\/p>\n\n The indicator\u00a0Durable Goods Orders<\/strong>\u00a0covers the statistics of production orders for durable goods with a lifespan of more than 3 years (cars, furniture, refrigerators, jewelry, etc.).\u00a0<\/p>\n\n Orders by industry are divided into 4 main categories: metalworking (primary metals), mechanical engineering, electrical equipment, and transport.\u00a0<\/p>\n\n To exclude the impact on statistics of large military orders, statistics are kept separately from defense\/non-defense.<\/p>\n\n The indicator is important<\/strong> for the foreign exchange market<\/strong> because it is an indicator of consumer confidence.<\/p>\n\n \u00a0A large volume of orders for high-value items shows the willingness of the consumer to spend money, which stimulates production and, consequently, other indicators of the economy.\u00a0<\/p>\n\n Therefore, high data on durable goods<\/strong> is a factor that strengthens the exchange rate<\/strong>.<\/p>\n\n Indicators characterizing the dynamics of stocks<\/strong> and their relationship with sales volumes\u00a0Exchange Rate and Inflation<\/h2>\n\n
\n
Procyclical<\/strong><\/td> Anticyclical<\/strong><\/td><\/tr> Strongly correlated<\/td> Weakly correlated<\/td> Counter-Cyclical<\/td> Acyclical<\/td><\/tr> Cumulative Output<\/strong> and output by sectors of the economy FMCG<\/strong> Stocks of Finished Goods<\/strong> Trade Balance<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n Leading Indicators<\/em><\/td> Lagging Indicators<\/em><\/td> Coinciding Indicators<\/em><\/td><\/tr> Workweek Length<\/strong> Number of Long-Term Unemployed<\/strong> GDP<\/strong> \n
Economic Growth Indicators, Gross Domestic Product<\/h2>\n\n
Manufacturing Sector Indicators<\/h2>\n\n
Industrial Production<\/strong><\/h3>\n\n
Capacity Utilization<\/strong><\/h3>\n\n
Durable Goods Orders<\/strong><\/h3>\n\n
Inventory Indicators<\/strong><\/h3>\n\n