This guide focuses on how you can use macroeconomic indicators to empower your futures trading strategies. It also lists the top 10 macro indicators you should consider exploring based on your preferred markets.
Complementing your futures trading strategy with macroeconomic indicators can take it to the next level since it would be able to capture more and broader market information. Macroeconomic indicators perfectly complement technical analysis tools to give a more complete and accurate forecast of market behavior. Macro indicators can be of help to both – traders with short- and long-term trading strategies.
Macroeconomic indicators are pieces of economic data that reflect the economic health of a particular sector, country, or region. These statistics help evaluate the current situation and future performance of the economy and financial markets.
Macroeconomic indicators are usually released by governments, national agencies or sectoral organizations. Among the most popular macroeconomic indicators include:
Macroeconomic indicators vary in frequency of release and their impact.
Some macroeconomic indicators have a specific release schedule (e.g., monthly, quarterly or annual), allowing investors, analysts, and traders to prepare and come up with a plan for the different potential scenarios.
In terms of impact, macroeconomic indicators can cause significant market volatility. The magnitude depends on the difference between the market consensus and the actual results in the macroeconomic releases, similar to share prices and earnings estimations – the bigger the gap, the higher the volatility.
Types of Macroeconomic Indicators
There are three types of macroeconomic indicators – leading, lagging, and coincident.
Leading indicators try to predict future performance and forecast where an economy might be heading. They are a preferred benchmark for governments in designing macroeconomic policies.
Lagging indicators represent the historical performance of an economy. Their results change post-factum and serve mainly for confirmation.
The third group is coincident indicators. They unite indicators that reflect real-time events.
Why Are Macro Indicators Important For Traders?
The link between trading and macroeconomics might not always seem so strong at first sight. However, there is a major reason why traders and investors alike rely on macroeconomic indicators to interpret current market developments and complement their projections for future trading and investment opportunities.
Keeping tabs on macroeconomic indicators can help traders better navigate market volatility, hedge a portfolio, or capture an arising trend.
So, what do GDP, the yield curve, or home sales data have to do with markets? Macroeconomic indicators like these can help surface potential patterns within the current or projected state of the economy. They measure the cost of money, the spending activity, and the level and direction of investment of a big part of the economy. For example, a growth in real estate or retail sales can indicate a booming economy, thus a potential strong performance of major indices.
Of course, macroeconomic indicators aren’t reliable as standalone metrics, but when paired with technical analysis tools, they can significantly boost short- and long-term strategies’ performance.
The importance of macroeconomic indicators has been proven times and times again. The latest example was the 2007 housing crisis in the US, after which analysts started paying higher attention to the real estate market state and outlook. Indicators like new and existing home sales, housing permits, and more have become more and more important for accurately depicting the economic health of a particular state or region.
Macroeconomic Indicators and Futures Trading
To understand the importance of macroeconomic indicators for futures traders, let’s start by saying what a futures contract is.
A futures contract is an agreement to buy/sell a particular asset at a predetermined price at a specified time in the future. Futures contracts cover all types of assets, including commodities (agricultural, energy, metals, etc.), bonds, indices, currencies, and more.
Due to the nature of the underlying assets and their pricing mechanics, futures contracts are heavily influenced by the current and future performance of the economy.
So, back to the main question – macroeconomic indicators serve as a foundation for futures traders to base their trading decisions. To trade on financial markets successfully, it is crucial to know which macroeconomic indicators may influence price action and any of your open or future positions.
For example, for a futures trader to protect themself from currency risk, they should know if there is such and at what point it might materialize. The best indication of this is macroeconomic indicators since they can give an early warning about potential currency increase or devaluation.
The same thing goes for commodity futures trading. In the process of designing their strategy, traders should take into account the potential developments in the commodity market (e.g., crop production dynamics, metals shortage/oversupply, energy market instabilities, etc.).
The bottom line is that good futures traders use technical analysis, while the best futures traders complement it with fundamental analysis metrics, including macroeconomic indicators. Of course, those metrics aren’t reliable on their own, but they give a good enough reflection of the dynamics in the economy. Keeping tabs on them also helps futures traders predict the market moves of others, which can potentially cause or exacerbate market volatility.
Top 10 Macroeconomic Indicators For Traders to Watch
Which is the best macroeconomic indicator to watch depends heavily on one’s trading strategy, asset preferences, and goals. While dozens of macroeconomic indicators can influence a trader’s decision-making process, not all are equal in their impact.
The macroeconomic indicators in the list below track different aspects of the economy’s health. As such, they have different ways to affect the price of a futures contract. However, the common thing is that all of them translate economic performance into the futures market dynamics – either directly or indirectly. Furthermore, this relationship isn’t always one-sided (for example, central banks might consider some futures contract prices in the short term as a gauge of market expectations and shape their monetary policy decisions accordingly).
Here is a list of 10 of the most common and important macroeconomic indicators, releases or data that futures traders might want to keep an eye on.
The growth of gross domestic product reflects the overall value of goods and services produced in a particular economy, indicating whether it is slowing or growing. Its results and projections are primary tools for analysis of the current and future state of an economy. Positive GDP results and projections signal a flourishing economy, while negative ones indicate a potential economic contraction.
In the case of the US, for example, the Department of Commerce issues a quarterly analysis of GDP, breaking down the activity into consumer spending, business investment, and government spending. The Bureau of Economic Analysis is another source for GDP data releases.
Commodity traders consider GDP results and forecasts a crucial benchmark for metals markets, for example. Usually, when the economy performs well, base metal prices remain low. On the other hand, if the economy worsens, base metals prices tend to go up. This affects the short- and long-term futures trading strategies.
The case of interest rates as a macroeconomic indicator is an interesting one since they can serve both as a leading and a lagging indicator. They are a leading indicator in the sense that once they are changed, the economy reflects the new rate. They can also be lagging since the decision for their change is usually in response to an existing economic imbalance. Interest rates serve as levers to control the economy – they are increased to stop it from growing too quickly and lowered to boost spending and avoid stagnation.
Interest rates are an essential factor in determining the price of futures contracts.
According to research by Harvard economists, money announcements that caused interest rates to jump up would, on average, cause commodity prices to fall. The same effect is noticeable with bonds. As such, interest rates and futures contracts’ prices have an inverse relationship.
Furthermore, the price of a futures contract decreases when it provides interest income (dividend). And vice-versa. The degree of this decline depends on the implied interest rate in a contract.
Periodical Economic Reports
Traders of futures contracts on commodities, indices, currencies, or bonds often keep an eye on annual, bi-annual, quarterly, or monthly reports since they reflect the state and projected trajectory of the economy.
In terms of the broader state of the US economy, for example, notable reports include the “Beige Book,” FED’s Monetary Policy Report, releases by the US Bureau of Economic Analysis, and more.
There are also niche reports giving a snapshot of particular aspects of the economic system.
The Unemployment Insurance Weekly Claims Report by the Department of Labor, for example, can not only indicate the job market dynamics but also give a reflection of the overall state of the economy since rising unemployment filings can signal a weakening economy and vice-versa.
Based on the asset you are trading, it is essential to note that different data sets have more influence in different sectors and countries. Let’s say that you are interested in trading corn futures. The U.S. is by far the world’s largest producer and exporter of corn. As a result, you should keep track of key reports like the USDA Report, the Planting Intentions Report, and the Grain Stocks Report.
Or let’s take industry and manufacturing. Production statistics can be one of the easiest ways to get leading data on the state of the economy. Increases in outputs positively impact the GDP and vice-versa.
In the US, there are various reports serving as barometers for the heavy industry’s performance and outlooks. Among the most popular is the Monthly Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders by the Census Bureau. It can signal changes in business performance (e.g., increased production capacity, thus potential growing operations) and consumer confidence. There are also releases from the Federal Reserve tracking capacity utilization in the factory sector.
Some traders also look at inventory-level reports to try to capture the market’s next move. High inventory levels for prolonged periods mean production isn’t leaving the warehouses, and the demand might be lowering, for example. This might result from changing market dynamics, like quickly decreasing purchasing power.
There are also reports by third-party organizations tracking the performance of particular markets like metals, energy, and more that are also very helpful in forecasting market changes.
Earnings Estimates and Share Prices
Looking at the stock market performance is a useful way to predict futures contracts’ underlying asset dynamics.
For example, when an economy is booming, businesses are healthier and more likely to report higher earnings. On the other hand, when the economy starts slowing down, the stock market is the first to react.
Of course, there are limitations to using stock market prices as macroeconomic indicators since they can be misleading. The reason is that stock prices can be inadequate (e.g., during market bubbles), artificially inflated, and manipulated.
That is why traders complement stock market performance with earnings estimates. Companies report their earnings every quarter, giving sufficient data to shape a fair market analysis. Progressively increasing earnings means a business is doing well, and the demand for its goods or services is growing.
Whether it is about stock prices or earnings estimates, it is always essential to have context. For example, seeing that a company is worth $5,000 per share or is reporting 15% projected revenue growth alone won’t tell you anything until you compare it with past performance. If the stock price has been consistently moving in similar ranges or the revenue growth for the last quarter was 20%, it means the company is stagnating rather than booming. Furthermore, if this is a major industry-leading company (e.g., the biggest steel producer), this might be a sign that the whole market is slowing down.
Inflation, Spending Power, and Retail Purchases
Consumer purchasing power dynamics are another good reflection of the overall state of the economy. High spending power indicates a stable economy, market confidence (check the Consumer Confidence Index by the Conference Board for reference), and potentially increasing demand for goods and services. For example, the Purchasing Manager Index (PMI) report is often used by Wall Street analysts who consider it a good indicator for GDP projections. Another widespread measurement of consumer spending is the Consumer Confidence Index by the Conference Board.
Monitoring information about purchased goods and services by the retail and business sector through retail sales data is also a common metric for complementing the analysis of economic activity. For example, in the US, consumer spending accounts for over two-thirds of the GDP. An increase in sales means the market is confident in the current and the short-term situation and is willing to pay for more than just the necessities. On the other hand, when consumers start feeling uncertain, they would restrict their spending.
As with any other indicator, consumer spending alone isn’t accurate since consumers and businesses might be recklessly taking loans to continue spending.
We can’t miss inflation as well, as it is among the most critical macroeconomic statistics since higher inflation can hurt consumer spending. Moreover, inflation dynamics can provoke monetary measures like interest rate hikes or decreases which can directly affect futures traders, as mentioned earlier.
The best sources of information for inflation levels usually are the Consumer Price Index, the Wholesale Price Index, and the Producer Price Index.
While this lagging indicator can be attributed to the previous category since it directly affects spending power, it deserves special attention. Currency strength is a significant signal of an economy’s stability and usually changes in response to political and economic circumstances.
When the economy is shaky, and uncertainty prevails, investors get discouraged, and there is a retraction of invested capital. The currency’s price is quick to reflect it by declining in value. Since a weak currency can buy less, imports get more expensive, meaning the costs for local companies and consumers increase, leading to a decrease in purchasing power. Although this can take a toll on the economy in the short term, it is also a blessing in disguise. A weak currency makes exported goods and services more competitive globally as they become cheaper for buyers. Moreover, it stimulates demand for domestic goods, which boosts the economy in the long term.
On the other hand, a high currency price is considered a sign of a strong economy (in most cases) and is viewed positively by investors.It boosts the economy by increasing the purchasing power of consumers and businesses. Countries that are net importers (buy more goods and services from abroad than they export) benefit from lower prices of imports. However, net exporting countries can experience shrinking demand for their goods and services since they become more expensive for buyers.
It is essential to always analyze this macroeconomic indicator in the context of a country’s or sector’s economic profile to understand how a weak or strong currency can impact it.
Real Estate Market State
The real estate market, including home building, construction spending, and home purchases, is a reliable leading indicator of the state of the economy and where it is heading.
Among the most reliable reports on the matter in the US is the Monthly New Residential Construction report by the US Department of Housing and Urban Development. It can be a good indicator of the state of the economy since an increasing number of issued building permits and construction completions can indicate an economy embracing an upward trajectory.
Organizations like the National Association of Realtors also issue reports, like the Existing Home Sales release, that are very useful in predicting consumer spending and are directly affected by economic factors, such as mortgage interest rates.
Declining home sales might indicate a weakening economy or even a potential crisis, as we saw in 2007.
The real estate market is a leading indicator since its developments extend over prolonged periods of time. For example, building permits are usually issued six months in advance. The number of homes in construction indicates a demand that will extend long into the future since the entire construction process can take up to a year or more. Note that most builders will start working on projects only if they are confident in the short-term perspectives of the market.
Real estate market dynamics can also signal potential changes in some commodities markets like metals, for example. Low demand for new homes will lead to low demand for construction materials, thus lowering their prices.
There is a strong link between the state of the economy and commodity prices. The prices of base metals, for example, are closely linked to the outlook for overall economic health since they tend to go up when the economy is in good shape and drop in times of recession.
For example, economists even refer to copper as “Doctor Copper,” joking that it is a metal with a Ph.D. in Economics. The reason is that you can often predict turning points in the global economy only by looking at copper prices since it is used in many industries – from heavy industrial machinery to advanced electronics. As a result, its demand can be indicative of expansion or contraction in economic output.
And vice-versa – a growing economy, most of the time, leads to increased demand for commodities like oil and wood, for example.
As a safe-haven asset, gold is another good indicator of the state of the global economy. When its price rises, it is a signal that the economy might be entering a decline.
However, looking at the direction of metal prices alone won’t always give you a fair representation of the state of the global economy. It is also essential to consider the rate of price drops or increases. Small changes can be natural and a result of a particular industry- or country-specific event. However, if the drops or hikes are substantial, the signal for a shrinking/growing economy is way stronger.
Yields Curve and Recession Risk Indicators
The slope of the yield curve reveals the bond market’s expectations about short-term interest rates based on factors like economic activity and inflation.
The bond market is an excellent leading indicator and a gauge of market expectations. Looking at the yield curve can give a trader a reflection of the short- and long-term market outlook. The performance of shorter-term bonds is often influenced by central bank decisions on the interest rate. On the other hand, long-term bonds are also impacted by interest rates, primarily by factors like inflation and economic growth.
During times of positive economic outlook, the yield usually has a positive upturn. On the other hand, when the economic outlook worsens, the yield flattens. An inverted yield curve usually indicates that economic growth will drop significantly, raising the chance for central banks to slash interest rates.
Keeping tabs on recession risk indicators is another reliable way of forecasting the economic outlook and potential monetary actions addressing it. As a result, it can be an early indicator of possible interest rate hikes/cuts.
Futures trading is a complex process, requiring strategies that take into account both – the short- and long-term market outlook. While technical analysis metrics are perfect for the former, the latter goes beyond charts and technical studies to also cover macroeconomic indicators. Nothing can ensure a proper bird-eye view of the medium- and long-term market situation as macroeconomic data can.
Factors like the broader economic outlook, sectoral perspectives, consumer spending, inflation, commodity prices, and more can serve as early indicators for the potential performance of the underlying assets for the futures contracts in one’s portfolio.
However, while academic findings suggest that some macroeconomic indicators can be increasingly reliable for gauging stock and futures market performance, it is advisable to use them only as complementary factors in your analysis. Most macroeconomic indicators aren’t fit to serve as the backbone of a strategy if applied as standalone metrics since they can lag and their signals aren’t straightforward but instead require broader context for accurate interpretation.
Due to this, the perfect futures trading strategy is a blend of technical analysis tools and macroeconomic indicators. Regarding the latter, the list above is a good start.
Which is the best macroeconomic indicator?
It depends on your trading strategy, asset preferences, and the goals of your analysis. For analysis of the broader economic outlook, metrics like GDP growth and projections, commodity prices, yield curves, stock market performance, and recession risk indicators are good tools. Sectoral reports and earnings estimations have proved sufficient indicators for industry-level analysis.
Where to find macroeconomic indicators?
The best places to find macroeconomic indicators are the official websites of the agencies or organizations responsible for releasing the particular macroeconomic data for the country or sector of your interest. Make sure to use one of the freely-available economic data calendars online to get familiar with the release schedule for the different macroeconomic readings and their potential impact rating.
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