Producer price index: The producer price index (PPI) measures price changes in the manufacturing
sector. There are three broad subcategories within the PPI which are generally used for economic
analysis: crude intermediate and finished. The market tracks the finished goods index most closely,
as it represents prices of goods ready for sale to the end user. The market places emphasis on the
‘core rate’ basket, excluding food and electricity, which are quite volatile and might obscure
inflationary trends.
Consumer price index: The consumer price index (CPI) measures the average price paid by
consumers for a specific basket of goods. The CPI is calculated by averaging the price changes of
all the components of the basket in order to determine inflationary trends. It is the benchmark
inflation index.
Employment Indicators
The employment report: The employment report is comprised of the household and establishment
surveys. The surveys produce non-farm payrolls, average workweek, and average hourly figures.
Together, these two surveys make up the employment report, the most timely and broadest
indicator of economic activity released each month.
The household survey is primarily used to indicate the unemployment rate. The rate is calculated by
dividing the number of unemployed by the number of people in the workforce. The unemployment
figure is quite volatile due, in part, to the small sample size of the survey—roughly 60,000
households. It is useful to crosscheck the household survey results with the labor and employment
figures to determine whether changes are truly representative.
The establishment survey measures productivity of the workforce. The most important component
of the survey—and indeed, in the entire employment report—is non-farm payrolls. Non-farm
payrolls measure the number of non-agricultural workers in the national workforce. The monthly
changes in payrolls can be extremely volatile from one month to the next. However, aside from
large swings and the possibility of rather substantial revisions to previous data, non-farm payrolls
offers the most comprehensive and extensive snapshot of the economy.
There are two more important indicators in the employment report that bear mentioning: the
average hourly earnings and average workweek figures. The average hourly earnings figure not
only offers an indication of personal income growth, and consequently a possible indicator into
future spending patterns, it also offers evidence of inflationary pressures. The number of hours
worked by the non-agricultural workforce is an important determinant in both industrial production
and personal income.
Unit labor cost: Non-farm productivity and costs measures worker productivity in relation to the cost
of producing a unit of output. During times of inflationary concern, the unit labor cost index in this
report can move the market. If productivity is falling, unit labor costs may be rising faster than hourly
earnings, which could lead to unemployment.
Initial jobless claims: The Initial jobless claims report measures the number of filings for state
jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the
economy. Due to the week-to-week volatility of jobless claims, many analysts track a four week
average to get a better picture of the underlying trend. It typically takes a sustained move of at least
30,000 claims to signal a meaningful change in job growth.
Consumer Spending
Retail sales: The retail report extrapolates consumer spending patterns from total receipts from
sample stores from different regions and product markets. Data is revised three months back, and
changes can be quite substantial. Comprehensive benchmark revisions take place once every five
years with the release of the Census of Retail Trade.
Employment Cost Index: The employment cost index (ECI) is a quarterly U.S. Department of Labor
report measuring workforce compensation in more than 500 industries across the entire United
States, in all states and major metropolitan areas. Like the average hourly earnings report, the ECI
can indicate inflationary pressures, as increased production costs are eventually passed on to the
consumer.
Consumer sentiment: The consumer confidence index (CCI) measures the confidence consumers
have in the economy, presently and in the future. There is a direct correlation between consumer
confidence and spending—the future expectations portion of the index is generally viewed as a
better indicator of future consumer spending patterns than the current conditions section. The
University of Michigan consumer sentiment index is almost identical to the CCI, but is twice
monthly, in a preliminary and final reading.
Auto sales: The auto and truck sales report measures the monthly sales of all domestically
produced vehicles. Big ticket sales, such as motor vehicles, are interest rate sensitive, making the
motor vehicle sector an important indicator of the state of the business cycle.
Chain store index: The U.S. Retail Chain Store Sales Index tracks spending at major chain stores
that fit into the general merchandise, apparel and furniture category based on a representative
sample of seven large retailers on a weekly basis. Though the report has little to say about broader
consumption patterns, it possesses market importance as an early indicator of consumer spending,
particularly during key sales seasons like December and August.
Political Factors
Governmental factors are vital to fundamental analysis. Changes in governmental monetary or
fiscal policy—or political crises—will generate changes in the economy, which in turn affects the
exchange rate. This is particularly evident in interest rate manipulation.
Interest rates: An interest rate increase adjusts the interest differential in the favor of the
representative currency provided that there is no parallel increase in the interest rate of the
currency partner. For example, if there is an interest rate hike in the United States and no change in
Japanese interest rates, the dollar will strengthen against the Yen. If in England, however, there is a
similar interest rate movement, the USD/GBP currency pair will remain unchanged.
Political crises: Political crises constitute the x factor in Forex trading. Unforeseen political
turbulence or events can trigger sharp currency movements, leading to a sharp decrease in trade
volume. The pip spread can, within seconds, widen by dozens of points. Unlike predictable political
events, political crises strike quickly and traders must react quickly to avoid big losses.
