Fundamental Analysis Module

This is the first podcast to the fundamental analysis module, and it is I want to explain what you need to understand about the fundamental news, and its impact on the markets.

All economies move in cycles which repeat endlessly. The timescale over which this occurs will differ, but the cycle itself will be repeated again and again.

Fundamental data comes in many different shapes and size, and is available from many different sources.

Politics also plays a part here, with politicians themselves, and in the last few years we have also seen some key referenda coupled with shifts in grass roots sentiment.

On the first Friday of every month in the US, at 8.30 am EST, comes a release that is probably the most anticipated by the markets.

As in any economy, if people feel confident and have security of employment, then they will spend and the economy will grow.

In the last few years employment data, including the NFP number, have been the most closely watched indicators, not only because they are considered to be the leading indicators for the health of the US economy, but also because this data set represents one of the Federal Reserve’s mandates, namely to maximise employment.

There is also a second major report on employment in the US, and this is the ADP.

It’s an economic fact that US economy consumer spending constitutes somewhere between 70% and 80% of GDP which, in simple terms means if and when the consumer stops spending, the US economy goes into reverse.

The CB Consumer Confidence Index is collated and released by a private non profit making company called the Conference Board on a monthly basis in the US.

However, this release has many detractors, and reasons include that the response rate is thought to be poor, with on average around only half of the survey responding within the required time.

Another release is the UoM (University of Michigan) consumer sentiment report, which is another of our composite economic indicators, and which ranks alongside the CB index.

The last of our consumer sentiment releases is the Core PCE, is a very interesting and important indicator, standing as it does for Personal Consumption Expenditure, as it measures consumer spending on goods and services by individuals.

Of all the economic indicators, GDP or gross domestic product is perhaps one of the most important, as it tries to give a snapshot of the economy in one simple number.

Another very important release is the PMI (Purchasing Managers Index), and is important because Purchasing Managers are at the sharp end of the manufacturing cycle, so they are acutely aware of how whether business is doing well or not.

Finally, in the US The Core Durable Goods release tries to measure the change in the total value of new orders placed with manufacturers for ‘durable goods’.

The housing market is crucial to every aspect of our lives and the economy. If house prices are rising, consumers feel confident. They spend more, and they are also more likely to move, adding some churn to the market.

Of the various regional bank data released in the US, it is the Philadelphia Fed Manufacturing index, or as it is more generally referred to the Philly fed which is the most closely watched.

For central banks, interest rates are the primary tool they use to control the money supply in an economy, and in the case of the Federal Reserve there are two interest rates that we have to watch, the FED Funds Rate and the Discount Rate.

The CPI or consumer price index is a key economic indicator and measure of inflation and, just like GDP, one that is watched by all central banks and governments for signs as to the level of inflation in an economy, and is therefore a guide to future interest rates.

The Producer Price Index or PPI is another key measure of inflation in the economy, only this time one that is designed to measure from the seller’s perspective, as opposed to the consumer’s perspective.

Moving to the employment cost index, this is a quarterly report issued in the US by the Bureau of Labor Statistics and is considered to be a leading indicator of inflation, and therefore another in the tranche of releases which reflect this key metric of expansion or contraction in an economy.

The Tankan economic indicator is released by the Bank of Japan on a quarterly basis ,and is the equivalent of the PMI, but is reported in a slightly different way. For yen traders the Tankan is the indicator to watch for three reasons.

As the economic powerhouse of Europe and the glue that holds the Eurozone together, at least for the time being, any economic release from Germany, has an impact not only in Germany, but also the Eurozone, and to some extent globally.

When considering the Eurozone, it is easy to forget there are currently 28 members in this trading block, and likely to be reduced to 27 once the UK has negotiated an exit.

And finally we have the LTRO or long term refinancing option from the ECB, which is a bit of a mouthful, but is simply the process by which the central bank, the ECB, provides financing for banks in the Eurozone. The intention is to provide a safety net of liquidity to ensure two things.

China is forecast to overtake the US as the world’s largest economy, so as forex traders, we really do have to understand China, not least because the Chinese economy will slowly and surely begin to dictate world economic cycles, in much the same way as the US economy has done for much of the last century.

Whilst Australia has the usual generic big number economic releases associated with any global country, there are in addition over twenty tier two releases.

And as mentioned in the extract from the report housing and housing related data is another of the key sectors, and the HPI data (House Price Index) released by the Australian bureau of statistics is well respected.

For the New Zealand dollar the overseas trade index is one of the interesting releases, but which falls outside the mainstream of fundamental news, in the sense it provides a unique view on the balance between imports and exports which is then reported as in index.

Another of our premier commodity currencies is the Canadian dollar, and in this video podcast I would like to cover several interesting and highly regarded price indices issued by Statistics Canada.

Moving away from index based releases and on to Foreign Security Purchases, this too is an interesting piece of data which deserves close attention as it can reflect deeper sentiment towards the Canadian economy and therefore act as a bellwether of strength and weakness in the currency itself.

For the UK, I am going to cover a large number of releases, as they demonstrate the diversity of reports you are also likely to find for any major economy.

In the UK, as indeed in many other global economies, housing is used as one of the fundamental metrics of inflation, growth, consumer confidence and spending.

Moving to the retail sector and here we have two releases from the British Retail Consortium which both reflect consumer spending in the high street itself.

And speaking of lending, this leads us neatly into another release from the Bank of England which reports net lending, which is the difference between new loans being granted and companies paying off debt and which also plays a key part in any monetary policy.

Finally for the UK we come to three releases from another authoritative body which is the Office for National Statistics.

The KOF Swiss Economic Institute defines itself as one of the leading economic think tanks in Switzerland, and whilst this may appear somewhat egotistical, nevertheless this is one of the most important releases for Switzerland and the swiss franc, and the term economic barometer defines this well.

Finally in this module on fundamental analysis, let’s take a look at some of the commodity related data and releases which can impact the commodity currencies particularly.

Moving away from Australasia we go to the other side of the world, and the US markets with oil, and here the focus is the weekly crude oil inventories report, issued by the IEA. And there are several noteworthy issues here.

And finally to the soft commodities sector which I want to include for completeness.