whatactuallyhappens. Whether the news is “good” or “bad” for the
economy is of no importance. If the market expects that 200,000 jobs
were lost last month but the report shows that only 100,000 jobs were
lost, this will be considered “stronger-than-expected” economic news by
the financial markets—having about the same effect on markets as a
gain of 200,000 jobs would when the market expected a gain of only
100,000.
The reason why markets react only to the difference between ex-
pectations and what actually occurs is that the prices of securities al-
ready incorporate all the information that is expected. If a firm is
expected to report bad earnings, the market has already priced this
gloomy information into the stock price. If the earnings report is not as
bad as anticipated, the price will rise on the announcement. The same
principle applies to the reaction of bonds, stocks, and foreign exchanges
to economic data.
Therefore, to understand why the market moves the way it does,
you must identify the market expectationfor the data released. The mar-
ket expectation, often referred to as the consensus estimate, is gathered by
news and research organizations. They poll economists, professional
forecasters, traders, and other market participants for their predictions
for an upcoming government or private release. The results of their sur-
veys are sent to the financial press and widely reported online and in
many other news outlets.^1INFORMATION CONTENT OF DATA RELEASES
The economic data are analyzed for their implications for future eco-
nomic growth, inflation, and central bank policy. The following princi-
ple summarizes the reaction of the bond markets to the release of data
relating to economic growth:
Stronger-than-expected economic growth causes both long- and short-
term interest rates to rise. Weaker-than-expected economic growth causes
interest rates to fall.
Faster-than-expected economic growth raises interest rates for sev-
eral reasons. First, stronger economic activity makes consumers feel
more confident and more willing to borrow against future income, in-
creasing loan demand. Faster economic growth also motivates firms toCHAPTER 14 Stocks, Bonds, and the Flow of Economic Data 239
(^1) Usually both the median and range of estimates are reported. The consensus estimate does vary a
bit from service to service, but the estimates are usually quite close.