In the past week we saw, among other indicators, worse than expected factory orders (-0.6%), productivity (-0.9%), initial claims (377 K), continuing claims (3293 K), and consumer credit ($6.5 billion). In the coming week, the Treasury budget, import and export prices, retail sales, the producer price index, the consumer price index, business inventories, current account balance, empire manufacturing, industrial production, and the Michigan consumer sentiment are among the hundreds of U.S. economic indicators that will be released and the thousands of global indicators. Of the “big” indicators coming out next week, which ones are likely to move the market and yet end up giving the wrong indication on the future of the economy?
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As is shown, the upcoming release of the retail sales numbers (both all retail sales and retail sales ex-auto) probably will move the market the most, but is only right about two-thirds of the time. Assuming no other effects, when looking at the statistics further, for every $1 million increased in retail sales, we should expect an increase in the S&P 500 by about 0.4 basis points. Not a large amount on a daily or annualized amount. The second most overrated indicator is Tuesday’s release of the Treasury budget. Interesting enough, when looking at the historical correlations and controlling for the other indicators, of the two parts to the Treasury’s budget release, outlay increases are generally associated with negative market performance, whereas the revenue side is slightly positive (although not statistically significant). The takeaway: sell on any significant increase in Treasury outlays. Taking third place is industrial production. The market will likely give it heavy attention, but it’s only right a little over half of the time. And, rounding out the overrated indicator: the Michigan consumer sentiment and the Empire Manufacturing Index.
On the underrated side of the upcoming week’s economic indicators, import and export prices are the most underrated, with the likelihood that the market will react to the announcements being about 15% to 20%, although the indicator is right closer to three-fifths of the time. Although volatile, the monthly export prices ex-agriculture give analysts an indication of the competitive position of the Nation. Import prices tend to be less useful because of the lag in the data. Taking third place is business inventories. The market sometimes ignores the Census Bureau’s report because two of the three pieces of information released with this report are known beforehand – the manufacturing and wholesale side – although, the retail side can be indicative of GDP growth. Because the report is only indicative of market performance one-third of the time, and the statistical correlation with the market performance, after adjusting for the effects of the other economic indicators, is low, the market may have it right to put this indicator in the low attention category. Other underrated economic indicators include the producer and consumer price indices. The indicators are right about two-thirds of the time and they carry a good deal of weight with the market.
Overall, in the coming week, the market is likely to give too great a weight to the retail sales and Treasury budget releases, with the Treasury budget releases likely to receive way too much attention from market participants. If you are going to read through the Treasury’s upcoming report, ignore the revenue side of the Federal Government’s balance sheet – it’s the outlays that matter.