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Linda Nazareth

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The big picture

Linda Nazareth

TORONTO (GlobeinvestorGOLD) — Some investors may say that economic reports are boring, and sure, with titles such as "non-farm payrolls," "building permits" and "The Beige Book" the compilers of the data themselves are not doing much to boost their readership. But the fact that one of these reports can lop off a significant chunk of your portfolio within seconds of its publication should be enough to demand some of your attention.

The truth is, economic indicators can move the markets and take your capital on a roller-coaster ride. And that's anything but dull.

Let's start with what an economic indicator is. Measures of economic activity are put out by a host of statistical agencies. In Canada, for example, Statistics Canada takes surveys on dozens of different factors, from oil prices to government jobs. Other Canadian statistics are examined by Canada Mortgage and Housing Corporation, as well as the Bank of Canada. In the United States, the list of number-crunchers is a long one, and includes the Department of Commerce, the Bureau of Economic Analysis, and the Federal Reserve, among others.

But take Statscan, for instance. It'll take its survey sometime over the course of a given month on some subject, such as the labour force. Next, Statscan compiles the data (number of people employed, number of people unemployed), then applies some statistical hocus pocus to make sure it's not comparing apples to oranges. For example, Statscan will "seasonally adjust" the numbers to ensure that the June unemployment numbers do not spiral just because there is a flood of students into the market. Then it releases the results, usually a month or two after the survey was taken.

C$ v. US$ over 3 monthsIt seems harmless — and tedious — enough. The figures that flash across traders' screens say something like "Canadian employment rises by 10,000 in June - unemployment rate up to 8.0 per cent." Within a minute of the release, however, the Canadian dollar might fall, bonds could climb, and institutional investors might be preparing to unload millions of dollars in Canadian stocks.

The numbers give clues to the health of the economy, you see, and they may or may not be in sync with the expectations of the market. The addition of 10,000 new jobs to the economy may sound like plenty to you, but not to a market that expected 50,000 new jobs. Consensus expectations, by the way, are generally based on surveys of analysts and economists at the major banks and brokerages.

Not all economic indicators move markets, of course. Some numbers, such as employment, are always watched carefully and are sometimes referred to as "top tier." Others, such as the report on wholesale sales, may not get much more than a glance. And the market-moving numbers change according to the market's particular fear-of-the-moment.

In late 1999, for example, many investors were afraid that the U.S. Federal Reserve was poised to ratchet up interest rates to head off inflation in a booming economy. As a result, the market started to obsess over every economic statistic related to price pressure. The U.S. Producer Price Index, a measure of prices paid to farmers, factories and other producers became a particularly powerful market mover. If it was expected to rise 0.2 per cent and instead rose 0.3 per cent, watch out. Stocks would tumble on the news, hammered by worry that higher interest rates will crimp consumer and corporate spending, and hobble profit growth.

These days, people fear recession rather than inflation. Top-tier indicators — the ones you should pay closest attention to — are anything related to employment or consumer sentiment. The University of Michigan's Confidence Index is one of the flavours of the month. It tracks consumers' feelings on current and future spending plans. Investors should also be scrutinizing retail sales, first-time claims for unemployment benefits as well as the monthly non-farm payrolls report and unemployment figure.

Financial markets can swing on the numbers almost immediately (or at least within an hour or two, since the most official economic reports come out before the stock market opens, at 8:30 am Eastern time). Still, the real use of the numbers is probably not to make day-trading gains, but rather to construct a clearer view of what is going on in the economy and the markets.

You are best served by tracking a host of numbers, and making your big decisions based on what you see. Suppose employment is soaring, retail spending is sizzling and inflation is creeping higher. A logical conclusion is that interest rates are likely to rise soon. Under the circumstances, you might want to hurry your mortgage re-financing, or maybe reduce your position in interest-rate sensitive securities.

Really, the whole thing is like a giant game of connect the dots. It's up to you to decide which dots to connect, and for you to decipher the emerging shape. And, since, the prize is a brighter financial future, what could possibly be boring about that?

Linda Nazareth is the Senior Economic Analyst for Report on Business Television and Canada's only full time on-air economist.

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