Knowledge

A company's share price is impacted by the fundamentals of the organisation, such as the experience of its leadership, the strength of its business model, and its competitive positioning in the market. These factors determine the intrinsic value of the stock. However, reports of business expansion, acquisitions, and earnings impact how traders perceive the company's performance and can prove to be much more market moving than any changes in the intrinsic value. The common thread among these is that they belong to the category of microeconomic factors, as they involve events within and around the company.

If you’re trading stocks, it is also important to keep an eye on the external factors that impact share prices. These fall under the category of macroeconomic factors. This is easy to do, with the help of a good economic calendar. You must still know which economic data releases have the most impact on the stock market and in which direction share prices could move.

1. A Change in Interest Rates

The central bank of every nation controls money flow in the economy. This is done by adjusting the interest rates, either with the aim of containing inflation or spurring economic growth. An increase in interest rates means a rise in the borrowing costs for companies, which has a direct impact on their bottom line. It also curtails the purchasing power of consumers, translating to lower demand for the company’s products. This way, an interest rate hike indirectly impacts the top line of businesses.

A pullback in interest rates means better profits for companies due to lower borrowing costs. It also means more revenues from an increase in demand for their products, as lower rates boost customer purchasing power.

When there is an interest rate hike or reduction, the most affected stocks are those that are rate-dependent, such as banking, real estate companies, insurance businesses, and money management firms.

Interest rates also impact the currency of an economy. Any hike in the interest rate supports the currency, as the improved rates attract foreign buyers. However, this has an adverse impact on multinational businesses, as their products become more expensive in other markets, lowering demand and causing a hit to revenues.

Remember

An interest rate hike tends to have an adverse impact on growth stocks (like the tech majors) and a positive impact on defensive stocks (like utilities and healthcare).

 

2. GDP

The total valuation of a country's production of goods and services over a predefined period is a strong indicator of the growth of an economy. Although GDP (gross domestic product) is a lagging indicator, it is among the most popular to gauge the health of an economy. GDP growth figures are released with reference to the previous year and the previous quarter. Although this report does not give any information on the outlook for the economy, it has a marked impact on sentiment among traders and investors.

A strong GDP growth figure indicates positive consumer sentiment, an improving labour market, and increased production. These have a positive impact on businesses and their share prices.

Remember

Any improvement in GDP growth will generally lift the stock market, while sentiment is likely to turn negative if the figure shows any deceleration in the economy.

 

3. Unemployment Rate

The percentage of the workforce without jobs is a measure of how much spending capacity the consumer has. Consumers earn from jobs and spend according to their income. Lower employment means reduced expenditure on non-essentials. A lower unemployment rate will typically be a bullish event for stocks.

On the other hand, some increase in unemployment during an economic expansion can have a positive impact on the stock market.

Did you know?

Unemployment has a more pronounced impact on a decelerating economy than a growing one.

 

4. Government Debt

Government debt is the total amount of money that the government owes to external parties. Most of this debt is in the form of outstanding government securities, which includes treasury bills, bonds, and notes.

What matters for the stock market is the yield on government debt, as this trickles down to businesses. If the government debt yield rises, it makes borrowing more expensive for businesses, which may have to raise the prices of their products or curtail costs by reducing investments on R&D and expansion.

A rise in government debt has a negative impact on the stock market. However, this can also be positive for certain stocks. Higher debt means the government is spending more on building infrastructure, industries, public facilities, and housing support. Eventually, the economy is building capacity to meet its needs, which has positive implications for companies, especially those associated with the construction and manufacturing industries.

 

5. Trade Surplus and Deficit

A country will incur a trade deficit if it continues to import more and export less for a considerable duration. This translates to reduced spending on domestic goods as capital moves out of the economy. In such a scenario, investors put their money in foreign companies, exerting downward pressure on the domestic stock market.

On the other hand, if a country is exporting more, the consumption of domestic goods increases overseas. It lifts share prices of domestic companies, provided imports remain the same.

Did you know?

Exports and imports do not usually work independently, and an economy experiences similar growth or contraction in both during any period, whether there is trade deficit or surplus.

 

6. Inflation

Inflation measures the rate at which the prices of goods and services increase in an economy. Inflation takes a toll on business profits, as it may take a few quarters to pass on the rise in input costs to customers. On the other hand, inflation exerts pressure on consumer spending, which means lower demand for businesses.

A sustained level of inflation is considered good for the growth of an economy, as it stimulates employment and raises living standards. But high inflation squeezes business profits, which may force companies to halt their hiring processes or even lay off workers. This eventually takes a toll on the standards of living in an economy.

Stocks of companies selling consumer essentials and energy continue to grow during periods of high inflation. Commodity-related businesses may see a rise in their share prices, as inflation increases the price of their output. Companies in the luxury segment are the hardest hit.

 

7. Non-Farm Payrolls

The NFP report is released by the US Bureau of Labor Statistics on the first Friday of every month. This is the single most influential report in the global financial market. The NFP report indicates the growth in payrolls in the non-farm sector and reflects the state of the country’s labour market, which is indicative of the future levels of economic activity. It helps policymakers take decisions regarding monetary and fiscal policy.

For the stock market, a strong job market spells growth, as companies produce more and earn higher profits.

All economic data releases shed light on the health of a country. It is useful to monitor the dates of releases, expectations and final figures reported, even if you are using technical analysis to identify market opportunities. What’s most important to remember is that the market moves when there is a deviation from the values predicted by analysts and economic experts. An economic data release that is in-line with expectations does not have a major impact on the financial markets.

 

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