SSRN Id1265074

Volume 14, Number 6 August 2008
F E D E R A L R E S E RV E B A N K O F N E W Y O R K
Current Issues IN ECONOMICS AND FINANCE

w w w. n e w y o r k f e d . o r g / r e s e a r c h / c u r r e n t _ i s s u e s
How Economic News Moves Markets

Leonardo Bartolini, Linda Goldberg, and Adam Sacarny
Exploring how the release of new economic data affects asset prices in the stock, bond, and foreign
exchange markets, the authors find that only a few announcements—the nonfarm payroll
numbers, the GDP advance release, and a private sector manufacturing report—generate price
responses that are economically significant and measurably persistent. Bond yields show the
strongest response and stock prices the weakest. The authors’ analysis of the direction of these
effects suggests that news of stronger-than-expected growth and inflation generally prompts
a rise in bond yields and the exchange value of the dollar.
he U.S. government and some private organiza- review and illustrate some of the key patterns that researchers
T tions regularly issue statistics on the performance

of the nation’s economy. These data releases can
lead to adjustments in the price of financial assets as market
have observed in market reactions to economic releases.
Specifically, we track how announcements of thirteen eco-
nomic indicators affect prices in three broad asset classes—
participants reassess their views of the economy’s current bonds, stocks, and foreign exchange—over a ten-year period
condition and its likely future evolution. ending in 2007. In doing so, we focus on the market’s reaction
Naturally, the nature and extent of the market response will to the part of each announcement that is actually news. By
vary with the announcement. Small unexpected changes in “news,” we mean the surprise element, or the difference
certain economic indicators may rock asset prices1 over a long between the actual value announced for an indicator and mar-
period, while shifts in other indicators—however large or sur- ket participants’ prior expectation of what that value would be.
prising—are quickly shrugged off by the markets. Moreover, Our analysis provides lessons on the relative scale and per-
while announcements about some economic indicators affect sistence of the recent responses of U.S. asset prices to economic
bond yields and exchange rates, news about others may chiefly announcements. We find that two government releases—non-
affect stock prices. farm payrolls and the GDP advance release—and the Institute
To explore this variety of responses, a substantial body of for Supply Management’s Manufacturing Report on Business
research has emerged in recent years, spurred by the increasing tend to have the strongest impact on asset prices, while indi-
availability of “high-frequency” data on asset prices—data cators such as the government statistics on personal income
reported at one-minute or even shorter intervals. In this edi- and personal consumption expenditures excluding food and
tion of Current Issues, we draw on such high-frequency data to energy typically have a small and transitory impact on prices.
Our evidence also confirms that economic indicators have an
1 For simplicity, we use the term “asset prices” throughout the article to refer
uneven effect across asset classes: unexpected changes in the
to bond yields, equity prices, and exchange rates. Although this applica-
data generally have the most marked impact on interest rates,
tion of the term is not precise (particularly in the case of bond yields), it is a weaker impact on exchange rates, and an even weaker impact
conventional. on equity prices. In addition, we find that while the direction
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CURRENT ISSUES IN ECONOMICS AND FINANCE VOLUME 14, NUMBER 6
and size of news effects on asset prices tend to be consistent from The consequences of economic news for exchange rates are
the time of the release to the end of the day, the immediate also somewhat ambiguous. These effects operate largely through
impact can generally be measured more precisely than the full- interest rates. While news of higher domestic inflation may lead
day impact. We conclude our analysis by noting that the true to a weaker currency over time, in the short term such news may
impact of economic news on asset prices may be larger than cause the currency to appreciate if investors expect the central
earlier research and our own study suggest, owing chiefly to the bank to respond to the higher inflation by raising its target short-
difficulty of measuring market participants’ expectations about term rate. Similarly, if investors believe that positive news about
upcoming economic releases. growth will raise demand for the domestic currency and put
upward pressure on interest rates, the domestic currency is likely
Predicting the Effects of Economic News to appreciate. However, if investors place more weight on the
Basic economic thinking would lead one to expect certain rela- surge in domestic imports that may follow stronger domestic
tionships between economic news and asset prices. Consider first growth, the domestic currency may depreciate as demand for
how news is likely to influence interest rates, such as yields on foreign currency rises. While both outcomes are plausible in
U.S. Treasury securities, federal funds futures, and Eurodollar theory, recent studies using high-frequency intraday data, such
futures. News of unexpected economic strength or of unexpected as Almeida, Goodhart, and Payne (1998), Andersen et al. (2007),
inflationary pressure will typically be seen by the markets as and Chaboud, Chernenko, and Wright (2007), find empirical
leading to higher interest rates. The reasoning is that a stronger evidence of a relationship in which economic announcements
economy will drive prices higher, prompting the central bank to indicating strength lead to currency appreciation, with interest
pursue tighter monetary policy than anticipated. Of course, rate tightening emerging as the dominant influence.3
investors cannot be certain about the timing and strength of the
central bank’s reaction to the news: if the bank’s reaction is Testing the Impact of News on Asset Prices:
muted or delayed, long-term rates may respond more than short- Data and Estimation Method
term rates. In general, however, interest rates have behaved as one In this section, we use recent data on asset prices and economic
would expect, rising in response to news of faster growth or news to estimate the effects of announcements on asset prices.
higher inflation, as documented in Andersen et al. (2007), Faust We compare our findings with the expected effects just outlined
et al. (2007), Goldberg and Leonard (2003), and Ehrmann and and with the insights gained in previous research. Our goal is to
Fratscher (2005). provide some simple lessons about the impact of economic indi-
The effects of economic news on stock prices are harder to cators on bond, stock, and foreign exchange markets.
predict. To understand why, consider how stock prices might Our methodology follows that of recent studies of the finan-
respond to a news release showing unexpected strength in the U.S. cial market effects of economic news. We tap a rich data set of
economy—say, a surprising fall in the unemployment rate or continuous quotes from Reuters wire service to track the effects
an unforeseen increase in personal spending. News that the econ- of announcements on asset prices at two time horizons: within
omy is growing faster than previously thought usually creates thirty minutes of the announcement and at 4 p.m. on the day
expectations of higher corporate earnings and dividends. These of the announcement.4 These two intervals are intended to cap-
expectations in turn should boost stock prices, according to the ture, respectively, the immediate and full-day response of prices
textbook view that a stock’s price should match the expected to economic news.
stream of future dividends from that stock, discounted to their The nine news releases examined in our analysis encompass
present value. However, as we saw just above, news that the thirteen of the nation’s most heavily watched economic indica-
economy is growing faster than anticipated will also lead to higher tors. The releases (and their corresponding indicators) are as
expected interest rates—the rates used to discount future divi- follows: Employment Situation Summary (nonfarm payrolls and
dends. Whether stock prices in fact rise or fall will depend on unemployment rate), consumer price index (CPI and CPI exclud-
whether the “numerator” (the stream of expected future divi- ing food and energy), personal income and outlays (personal
dends) or the “denominator” (the discount rate, plus compensation consumption expenditures [PCE] excluding food and energy,
for risk) responds more strongly to the news. The same rule applies personal income, and personal spending), gross domestic product
to the response of stock prices to news of inflation: inflation boosts (GDP advance release), ISM Manufacturing Report on Business
prospective nominal future earnings and the nominal rate at (ISM manufacturing), new residential construction (housing
which such earnings are discounted. Given the uncertain interplay starts), Conference Board Consumer Confidence Index (con-
of these variables, it is not surprising that many studies cannot sumer confidence), University of Michigan Survey of Consumers
identify consistent effects of economic news on stock prices.2
3 Chaboud, Chernenko, and Wright (2007) also show that foreign exchange
2 Boyd, Hu, and Jagannathan (2005) show that stock prices respond differently
trading volumes respond to economic news.
to changes in unemployment during recessions and expansions because the 4 We also captured the response of asset prices at 1 p.m. The midday results gen-
dividend and discount rate effects have different weights at different points of erally showed patterns intermediate between those found within thirty minutes
the business cycle. and those found at the end of the business day.
2
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(consumer sentiment), and advance monthly sales for retail trade
and food services (retail sales less autos).5 We assess the impact of Methodology
these indicators on three sets of asset prices—interest rates, To estimate the response of asset prices to the news element
exchange rates, and equity prices—for the period from January in select economic indicators, we run a series of ordinary
1998 to July 2007. The specific asset prices are the two- and ten- least squares (OLS) regressions, incorporating each of the
year Treasury yields, the Eurodollar and federal funds futures seven asset prices, each of the nine economic data reports,
rates,6 the spot dollar/euro and yen/dollar exchange rates, and and each of the two time intervals, for a total of 126 regres-
the Standard & Poor’s 500 Index. sions of the form j
As noted earlier, we construct a measure of “news” equivalent Δ APi,t = β i,0 + Σ βi,k * δi,k,t + εi,t ,
k=1
to the difference between the announced value of an economic where i indicates the asset; t is the time the report was
indicator and the value that was expected prior to the release.7 released; ΔAPi,t is the change in asset price or yield at
The expected value is captured by the median response from the thirty minutes after the release or through 4 p.m.; δi,k,t is
last preceding weekly survey of market participants conducted the corresponding news measure, with k indexing indica-
by Bloomberg L.P.8 We measure the asset price response to news tors within a report and j taking values between one and
as the percentage change (or percentage point change, for yields) three for any given report, depending on the number of
from immediately before the announcement to thirty minutes indicators in the report. For example, the Employment
after the announcement and from before the announcement to Situation Summary contains both the unemployment rate
4 p.m. on the same day. More detailed information about our esti- and the nonfarm payrolls release, so the corresponding
mation method can be found in the box. regressions include two news measures as regressors. In
the discussion of our results in the text, we focus on the
Main Findings estimated coefficients βi,k , each of which represents the
We present the results of our estimation in the table. Note that average impact of a unit of news on a particular asset price
over a specific intraday interval.
the results are divided into three panels corresponding to the
three asset classes considered—bonds, foreign exchange, and
stocks. The top panel summarizes the responses of the four bond change in the asset price is in the same direction as the change in
rates to announcements of the thirteen economic indicators; the the indicator, so that a rise in GDP, for example, would elicit an
middle panel, the responses of the two exchange rates; and the increase in the asset price. The significance and sign of the asset
bottom panel, the responses of the S&P 500 Index. price response to an announcement are captured over two time
The number before the slash in the first two columns of the intervals—from immediately before the announcement to thirty
table represents, for each indicator, the number of asset price minutes after it (column 1) and from before the announcement to
responses that are statistically significant at the 5 percent level— 4 p.m. (column 2). The middle two columns in the table show the
a criterion that assures us that the response is highly unlikely to number of estimated responses (coefficients βi,k) that are found
be the result of random chance.9 The number after the slash tells to be “large,” that is, greater than one-half of one standard devia-
us how many of these responses are positive—meaning that the tion of the asset price.10 The last two columns of the table show
whether the signs of the immediate and full-day asset price re-
sponses are the same, and whether the precision of the estimated
5 The government agencies responsible for data releases are as follows: the response (as captured by the standard error in the estimate)
Bureau of Labor Statistics, for the Employment Situation Summary and CPI; declines between the thirty-minute and full-day intervals.
the Bureau of Economic Analysis, for personal income and outlays and gross
domestic product; the Bureau of the Census, for new residential construction With this schematic in place, we can draw some conclusions
and advance monthly sales for retail trade and food services. about the relative impact of various U.S. economic announce-
6 The futures contracts examined are the nearest-term Eurodollar futures con- ments. Clearly, certain announcements dominate as drivers of
tract (a contract written on the Eurodollar rate ninety days after the beginning market reaction. The Employment Situation Summary, with its
of the month following the current one) and the second-month federal funds nonfarm payrolls and unemployment rate components, and the
futures contract (a contract written on the average federal funds rate in the sec- ISM Manufacturing Report on Business have statistically signifi-
ond month after the current one). cant effects on five to seven asset prices; the effects are large and
7 For nonfarm payrolls and housing starts, this measure is further divided by the persist through the end of the day. The GDP advance release and
previously announced value of the indicator. consumer confidence index also significantly affect most of the
8 The Bloomberg survey polls a group of economists, the number varying with
asset prices, though for both indicators the number of signifi-
the degree of interest in the indicator at issue. Surveys of highly watched indica- cant responses drops by day’s end. Other data releases have a
tors, such as the unemployment rate and nonfarm payrolls, often have more than
fifty respondents. The lag between the participants’ response and the date of the 10
indicator release also varies, from a few days to two weeks. To compare the response coefficients across asset prices and indicators, we
divide each indicator, asset price, and yield change by its standard deviation.
9 Summing the numbers in the three panels, we see that an announcement could The resulting coefficient describes the response of the asset price, in standard
elicit a maximum of seven significant asset responses. deviation units, to a one-standard-deviation surprise in the indicator.
w w w. n e w y o r k f e d . o r g / r e s e a r c h / c u r r e n t _ i s s u e s 3
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Response of Asset Prices to Economic Announcements: Summary of Regressions
Bond Yield Responses a

Significant/Positive Sign Large in Size Same Sign at 30 Min. Standard Error at 4 p.m.
Announcement At 30 Min. At 4 p.m. At 30 Min. At 4 p.m. and at 4 p.m. Exceeds That at 30 Min.
Nonfarm payrolls 4/4 4/4 3 4 4 4
Unemployment rate 3/3b 1/1b 1 0 4 4
ISM manufacturing 4/4 3/3 2 2 4 4
GDP advance release 3/3 3/3 2 2 4 3
Consumer confidence 3/3 2/2 2 0 4 4
Retail sales less autos 3/3 1/1 1 0 4 3
CPI excluding food and energy 3/3 2/2 1 0 4 4
Consumer price index 0/0 0/0 0 0 4 4
Consumer sentiment 3/3 1/0 0 0 3 4
Housing starts 0/0 0/0 0 0 0 4
PCE excluding food and energy 0/0 0/0 0 0 3 4
Personal income 0/0 0/0 0 0 1 4
Personal spending 0/0 0/0 0 0 2 4
Foreign Exchange Rate Responsesc

Unemployment rate 1/1b 1/1b 0 0 2 2
Equity Responses (S&P 500 Index)

Unemployment rate 1/1b 1/0 b 0 0 0 1
a The four bond rates considered are the two- and ten-year Treasury yields, the Eurodollar futures rate, and the federal funds futures rate.
b A negative coefficient for the unemployment rate is counted as a positive response, since a decline in this indicator (unlike other indicators) implies economic strength.
c The two exchange rates considered are the dollar/euro exchange rate and the yen/dollar exchange rate.
4
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narrower impact. The retail sales indicator, the CPI excluding food addition, the increase elicits responses across asset classes that
and energy, and the consumer sentiment index have notable tend to be large and significantly different from zero.
effects, but the effects are mostly confined to interest rates and To be sure, the chart shows a widening of the 95 percent confi-
diminish perceptibly by day’s end. The remaining indicators—the dence intervals over the course of the day—a sign that the
CPI, housing starts, and the components of the personal income responses are estimated less precisely as the response interval
and outlays report—elicit weak and generally insignificant lengthens. Still, the full-day responses typically have the same
responses. As for the distribution of these effects across asset sign as the immediate responses, and have a statistically similar
prices, we see that the effects on interest rates and exchange rates magnitude. As we saw in the table, these patterns hold in large
tend to persist, while only the unemployment rate has a significant part for all economic indicators that elicit a significant response in
impact on equity prices by day’s end, and this impact is not large. asset prices.
In addition to clarifying the relative strength and persistence In sum, our analysis points to a concise set of lessons about
of the announcement effects in our sample, the results summa- the impact of economic announcements on key U.S. asset prices.
rized in the table shed light on the direction of these effects. In First, only a few economic indicators give rise to asset price
almost every case in which an estimated response is statistically responses that are economically significant and measurably per-
significant, the response is positive. This finding supports the sistent through the day. Second, the significant responses support
view that interest rates should increase, the dollar should the view that asset prices rise (in nominal terms) in response to
strengthen, and stock prices should rise (all in nominal terms) news of stronger growth and faster inflation. Third, the strongest
in response to news of stronger-than-expected economic growth effects are seen on interest-bearing assets, and the weakest and
or stronger-than-expected inflation. Interestingly, the positive most erratic on stock prices. Fourth, the immediate effects of
responses of interest and exchange rates accord with the findings economic news on asset prices are easier to assess than the full-
of the studies we cited earlier. Our results show that economic day effects, because the accumulation of other shocks to asset
announcements have a much more muted impact on stock prices prices through the business day makes the identification of per-
than on interest rates or exchange rates: only one of the thirteen sistent effects more difficult.
stock price responses is statistically significant by 4 p.m., and
this response is neither large nor positive. The Problem of Measuring Market Expectations:
Another important finding of our estimation exercise is that Implications for Our Results
asset price responses can be ascertained more precisely a short Our approach to measuring the effects of economic news on asset
time after the announcement than later in the day. As the table’s prices, like the analogous approaches used by other practitioners,
last column shows, the estimated responses at 4 p.m. exhibit is likely to provide a conservative estimate of the scale of these
greater standard errors than the responses thirty minutes after the effects. The reason is that the measure of news we construct—
announcement. Here too, our results accord with those of some the difference between the value announced for an indicator and
prior studies. Moreover, the noise around the predicted responses the value expected by the market—relies on survey data to cap-
(as gauged by the residuals of the regressions, not shown in the ture the market’s expectation.13 Although the survey data provide
table) is also smaller after thirty minutes than later in the day. the best available real-time measure of market sentiment, they
This result is intuitive: as time passes after a data release, other still have some shortcomings.
forces will influence asset prices, increasing the uncertainty of the Most notably, survey data may capture market expectations
response. Thus, our results support the view that asset markets with errors. One source of error is the lag between the date of the
tend to absorb the impact of economic news rather quickly.11 survey and the release of the indicator. Surveys are typically con-
To provide a different perspective on our empirical results, we ducted in advance of data releases, with leads ranging from a few
present in Chart 1 a rendering of the announcement effects of days to a week or more. Such leads imply that by the time of the
one key indicator, nonfarm payrolls. We assume a 1 percent sur- announcement, a great deal of new information on the indicator
prise increase in this indicator and plot the responses of each of may have accumulated, so that part of the “measured news” is no
longer news. The accumulated information could include signals
the seven asset prices on the vertical axis.12 The news, on impact,
gathered from a variety of sources, including another indicator
raises the yield on two-year Treasury securities by 78 basis points
release, a pertinent policy statement, and other domestic or for-
on average, and nearly all of this effect remains at day’s end. In
eign developments. In this sense, the amount of news contained in
a data release may be smaller than what we measure, so the effects
11 One might instead reason that the full-day impact would yield the most pre-
of the actual news may be even larger than our estimates suggest.
cise measure since markets need time to digest economic news. Indeed, some
recent studies that focus on the microstructure of financial markets (for 13 Earlier studies of announcement effects usually defined news with respect
example, Evans and Lyons [2005]) present theoretical and empirical evidence
suggesting that it takes time for news to become incorporated in asset prices. to the predictions of an empirical forecasting model—a practice that made
the resulting measure of news dependent on the model chosen to generate the
12 We have chosen, for the simplicity of our illustration, a large surprise of 1 per- forecasts. Thus, it was unclear whether a finding that news affected asset
cent. In our sample, the largest absolute value of a nonfarm payrolls surprise was prices only slightly was truly indicative of a weak impact or instead reflected
0.3 percent, and most surprises were considerably smaller. an inadequate forecasting model.
Chart 1
Response of Asset Prices to a 1 Percent “Surprise” in Nonfarm Payrolls
a
Two-year Treasury yield a Ten-year Treasury yield Eurodollar futures ratea Federal funds futures ratea
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
30 min. 4 p.m. 30 min. 4 p.m. 30 min. 4 p.m. 30 min. 4 p.m.
b b c
Dollar/euro exchange rate Yen/dollar exchange rate S&P 500 Index
6 6 6
4 4 4
2 2 2
0 0 0
-2 -2 -2
-4 -4 -4
30 min. 4 p.m. 30 min. 4 p.m. 30 min. 4 p.m.
Notes: The heavy central line of each box plot shows the estimated asset price response to the surprise. The box represents a one-standard-error confidence interval
around the response, and the “whiskers,” a two-standard-error confidence interval.
a b
In basis points. Dollar depreciation, in percentage points. c Change in index, in percentage points.
Another source of measurement error is the fact that market To illustrate the difference in results between standard
expectations are constructed from the survey responses of a approaches and this alternative methodology, we first compute
small subset of investors. As a limited sample of the whole mar- the Rigobon-Sack responses of the various asset prices in our
ket, these investors represent the overall market view up to a ran- sample thirty minutes after the release of the ISM Manufacturing
dom factor. Furthermore, many of the individuals polled, while Report on Business, an indicator that we identified earlier as one
capable professional forecasters, are not in charge of managing of the most significant in its effects on asset prices. We then com-
their companies’ portfolios, and thus may have little monetary pare our estimates of the asset responses to the ISM report with
incentive to provide their most considered forecast.14 those generated by the Rigobon-Sack methodology (Chart 2).
In an effort to provide insight into the potential consequences The comparison produces two findings. First, the Rigobon-
of survey data problems, Rigobon and Sack (2008) have devel- Sack approach yields estimates of asset price responses that
oped a methodology to estimate the impact of news when “true
agree in sign with those produced by our standard OLS approach
news” (that is, the indicator as released minus the indicator as
(see box). Second, the Rigobon-Sack estimated responses are
expected one instant before the release) differs from the standard
typically larger than their standard counterparts. The intuition
definition of news, or “measured news” (that is, the indicator as
underlying this finding is simple: the true news contained in an
released minus the indicator as expected at survey time), by a ran-
dom measurement error. The essence of the Rigobon-Sack indicator release is typically smaller than the measured news
methodology is to correct the estimated asset price response for because it is cleaned of measurement errors and of the informa-
the measurement errors that arise when surveys of forecasts are tional noise that accumulates between the survey and the release.
conducted well before the actual data release. Therefore, the asset price impact per unit of true news is typically
larger than the impact per unit of measured news.
14 Studies have shown that forecasters may not learn quickly from their mis- Note, however, that while the Rigobon-Sack methodology
takes, an outcome that can lead to correlated forecast errors (see, for instance, delivers a better measure of the impact of news on asset prices, it
the discussion in Gürkaynak and Wolfers [2007]). Individual forecasts may cannot be used in practice to forecast the asset price response,
also be biased because forecasters may wish to maximize public recognition because true news is not available to observers in reality. The mar-
when their names or affiliations are explicitly listed (Laster, Bennett, and
Geoum 1999; Lamont 2002). Some forecasters have also been found to skew ket’s expectations of the future economic release are known only
forecasts toward outcomes that would benefit their firms, a practice that Ito as of the time of the last survey, not as of one instant before the
(1990) dubs “wishful expectations.” announcement, as would be required to put the Rigobon-Sack
6
Chart 2 References
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About the Authors

Leonardo Bartolini is a senior vice president, Linda Goldberg a vice president, and Adam Sacarny an assistant economist in the
International Research Function of the Research and Statistics Group.
Current Issues in Economics and Finance is published by the Research and Statistics Group of the Federal Reserve Bank of New York.
Leonardo Bartolini and Charles Steindel are the editors.
The views expressed in this article are those of the authors and do not necessarily reflect the position
of the Federal Reserve Bank of New York or the Federal Reserve System.

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Volume 14, Number 6 August 2008

Current Issues IN ECONOMICS AND FINANCE

How Economic News Moves Markets

T tions regularly issue statistics on the performance

Response of Asset Prices to Economic Announcements: Summary of Regressions

Bond Yield Responses a

Foreign Exchange Rate Responsesc

Equity Responses (S&P 500 Index)

About the Authors

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