Contents (8)
The list of factors is short and you can learn it in ten minutes. Interest rates, inflation, employment, growth, company earnings. Every article on this subject gives you that list and stops there.
The useful part is what the list leaves out. Markets do not move on the number. They move on the gap between the number and what was already expected. Once you understand that, most of what gets sold as economic analysis stops looking like an edge.
The main factors, and which way they usually push
These are tendencies, not laws. Each one has produced the opposite result plenty of times, for reasons explained in the next section.
| Factor | Usual effect on share prices | Why |
|---|---|---|
| Interest rates rise | Downward pressure | Borrowing costs more, future earnings are worth less today, and bonds become a more attractive alternative |
| Inflation rises unexpectedly | Downward pressure | It makes rate rises more likely, and it eats into real earnings |
| Strong employment data | Mixed | Good for company revenue, but it can also make rate cuts less likely |
| GDP growth above expectations | Upward pressure | More economic activity usually means higher company profits |
| Company earnings beat expectations | Upward pressure on that company | The most direct link on this list, and even this one fails regularly |
| Central bank signals a policy change | Often the biggest mover on the list | It changes the assumption underneath every other valuation |
Notice how many of these come back to interest rates. For shares, the rate path is usually the main variable, because it sets what every future stream of earnings is worth today.
The part that changes everything
Here is what people miss. By the time a number is published, the market has already priced in what it expected that number to be. The price you see before the release already contains the forecast.
So the move comes from the surprise, not from the level.
| Expected | Actual | The surprise | Typical reaction |
|---|---|---|---|
| 150,000 jobs | 200,000 | A clear beat | Rises |
| 200,000 jobs | 200,000 | None | Little movement |
| 250,000 jobs | 200,000 | A miss | Falls |
The actual number is the same in all three rows. This is why you will see strong economic data arrive and the market fall, and then read commentary explaining it afterwards as if something subtle happened. Nothing subtle happened. The number was good and the expectation was better.
It works the other way too, which is even more confusing to watch. Bad news can lift a market that was braced for worse.
Why the economic calendar is not an edge
This follows directly. If the move depends on the surprise, then to profit from a release you would need to know something about the number that the consensus does not, before it is published.
- You are reading the same figure at the same second as everyone else.
- Institutions have machines placed next to the exchange that react in microseconds. By the time you have read the headline, the first move has already happened.
- Spreads widen around releases and slippage increases, so even a correct call can fill badly. There is more on that in managing risk in trading.
None of this means economic data is irrelevant. It means the data is not a trading signal for a retail account, and anyone selling a strategy built on trading the release is selling a race you are entering on foot.
The position an inflation print took in seconds
I had a position I was happy with, and then an inflation release landed and the market lost its mind. Seconds. Everything I thought I knew about where price was going stopped mattering because one number had missed a forecast.
So I tried the obvious response and traded the releases themselves. That went worse. The first move after a release is not the market deciding anything. It is a scramble, and the spikes threw me out of position so many times that I gave up on the idea for good.
What I do now is not clever. When there is a major release on the calendar, I am not in the market for it. I let the first wave pass, wait for the spread and the movement to settle, and decide afterwards on whatever is actually left.
That is what the calendar is really for, as far as I am concerned. Not a list of opportunities, but a list of times to be somewhere else.
What the calendar is actually for
It has a real use, and that use is defensive, not predictive.
- Knowing when volatility is coming. You can see in advance which hours carry a scheduled release and treat them as higher risk.
- Deciding not to hold through one. If a position would be badly hurt by a spike in either direction, closing it beforehand is a real strategy, not timidity.
- Explaining a move afterwards. Knowing that rates drove the week helps you understand conditions, even though it would not have helped you predict them.
- Context for the longer term. If you hold positions for weeks, the rate environment matters a great deal more than it does to someone closing every day.
Which hours those are, and the other times worth avoiding, is covered in the best time of day to trade.
What matters most, by market
The same release does not carry the same weight everywhere.
| If you trade | The factors that move it most |
|---|---|
| Individual shares | Company earnings first, then the sector, then interest rates |
| Stock indices | Interest rate expectations and central bank language, above almost everything else |
| Currencies | The difference in rate expectations between the two countries, not either one alone |
| Commodities | Supply and demand for that commodity, plus the dollar, plus growth expectations |
| Crypto | Liquidity conditions and risk appetite. It behaves more like a high beta technology asset than a currency |
The currency row is the one most often taught wrongly. A rate rise does not strengthen a currency on its own. It strengthens it relative to a country where rates are not expected to rise, and only if the rise was not already expected.
Common questions
What economic factors affect stock prices the most?
For the market as a whole, interest rate expectations and what the central bank signals about them. For an individual company, its own earnings against what analysts forecast. Almost everything else on the usual list works by changing one of those two.
Why did the market fall on good news?
Because the news was not as good as the price already assumed, or because it made a rate cut less likely, or because the move had been expected and the people who expected it took their profits. All three are ordinary, and none of them needs a conspiracy.
Should I trade the news?
As a beginner, no. The spread widens, the fill is unreliable, the first move happens faster than you can act, and the direction depends on a forecast figure you are not in a position to judge. Standing aside during releases is a strategy, and a sensible one.
Do I need to follow economics to trade?
You need enough to know when the calendar is busy, so a scheduled event never surprises you. You do not need a big picture view of the economy, and having one is a common way to get attached to a position that the chart has already disagreed with.
The short version
Interest rate expectations dominate, everything else mostly works through them, and the market moves on the gap between the number and the forecast, not on the number itself.
Use the calendar to know when to be careful, not to know what will happen. The first is achievable. The second is what is being sold to you.