Explore Financial Market: Fundamental analysis and Economic Indicators (Cont.)

From the previous article, we have discussed the topics - central banks, interest rates and various inflation indicators. Now, let’s extend our exploration to the financial market. This article will concentrate on fundamental analysis: employment, retail sales, home sales, and trade balance.

Employment

Employment is a crucial component of fundamental analysis in economics and financial markets. The level of employment has a direct impact on currency exchange rates because it influences both current and future spending.

Unemployment Rate

The unemployment rate is a key employment indicator that measures the percentage of the labour force that is currently without a job and actively seeking employment.

For example, an increase in the unemployment rate is typically seen as an indicator of economic weakness, which tends to decrease the demand for a country’s currency. In contrast, when a country has strong employment numbers, it usually signifies economic growth, consumer confidence and potential business expansions. This positive situation can attract foreign investors and traders, leading to higher demand for the country’s currency.

Nonfarm Payrolls

Nonfarm payrolls, often shortened as "NFP," is a key economic indicator in the United States. It represents the net change in the number of nonfarm jobs (those excluding agricultural employment) in the country over a specific time period, typically a month. The Nonfarm Payrolls report is released on the first Friday of each month by the U.S. Bureau of Labor Statistics (BLS) as part of the Employment Situation report. It provides valuable insights into the overall health of the U.S. labour market and the potential for economic expansion.

The NFP report is closely watched by the U.S. Federal Reserve and other central banks. A strong NFP report, indicating robust job creation, can lead to expectations of higher consumer spending and economic growth. In response, central banks may consider tightening monetary policy, such as raising interest rates, to prevent potential overheating and inflation. Conversely, a weak NFP report might lead to expectations of economic slowdown, which could lead central banks to implement accommodative policies, like lowering interest rates, to encourage economic growth.

Jobless Claims

Jobless claims, often referred to as "weekly initial jobless claims" or simply "initial claims". They represent the number of people filing for unemployment benefits for the first time during a specified reporting period, usually on a weekly basis in the United States.

Jobless claims provide valuable insights into the health of the labour market. A high number of jobless claims, particularly if it sustains over several weeks, can indicate labour market difficulty. It implies that more people are losing their jobs and filing for unemployment benefits, which could mean economic challenges, business layoffs, or industry-specific issues.

Conversely, a decreasing number of jobless claims, especially if it continues over time, can signal improved labour market conditions. It indicates that fewer people are newly unemployed and seeking benefits, which can be a positive sign for economic stability and potential job growth.

Consumer Spending

When more people are employed and wages are rising, consumers are often more willing to spend, which can boost economic growth and corporate earnings. This is because the consumers have confidence in their financial stability and increased disposable income. Hence, they are more inclined to open their wallets and spend.

In other words, higher consumer spending will drive demand for goods and services. Then, businesses respond to this increased demand by producing more, which can lead to job creation and economic growth.

This is a cycle, when businesses are growing, they often need to hire more workers to keep up with production, which can lead to lower unemployment rates and higher wages. As a result, it reinforces consumer spending power.

Retail Sales

Retail sales is an important economic indicator because it provides insights into consumer spending, which is a significant driver of economic activity. It measures the total amount spent on various goods and services by consumers within a given country during a specific period, typically on a monthly or quarterly basis. Changes in retail sales can have a notable impact on the overall economy.

An increase in retail sales is generally viewed as a positive sign for the economy. It indicates that consumers have the confidence and extra incomes to make purchases, signalling a healthy and growing economy. In contrast, declining retail sales can signal economic challenges, as it may indicate reduced consumer spending and confidence.

U.S Retail Sales Released: Monthly, approximately mid-month; time 20:30 UTC+8

Home Sales

A growing housing market can indeed be considered one of the major indicators of a strong economy, and it is often closely tied to consumer confidence and mortgage rates. For instance, when consumers have confidence in the economy and their personal financial situation, they are more likely to make significant investments like buying a home. Rising consumer confidence often corresponds with increased home sales, as people feel more secure about their ability to make long-term financial commitments. Besides, lower mortgage rates make borrowing more affordable, leading to increased demand for homes.

Home sales reports reflect the aggregate demand among consumers for housing. These reports provide valuable insights into the state of the housing market and the broader economy. Increasing home sales typically suggest strong demand, which can stimulate economic activity in related industries, such as construction, home improvement, and real estate services.

U.S Home Sales Released: Monthly, third week of the month; time 22:00 UTC+8

Trade Balance

The trade balance is a component of a country’s balance of payments, which records all economic transactions between a country and the rest of the world. It specifically focuses on the difference between the value of a country’s imports and the value of its exports.

Trade deficit occurs when a country’s imports exceed its exports. In other words, a country is buying more from other countries than it is selling to them. A trade deficit typically means that the country is spending more foreign currency (used to pay for imports) than it is earning from exports.

Conversely, trade surplus happens when a country’s exports exceed its import. This means that the country is selling more to other countries than it is buying from them. A trade surplus often indicates that the country is earning more foreign currency from exports than it is spending on imports.

The trade balance can have a significant impact on a country’s currency exchange rates. When a country has a trade surplus or a declining trade deficit, it implies that there is increased demand for its currency in the international markets. In other words, foreign entities need to acquire the country’s currency to pay for its goods and services. This increased demand for the currency can lead to its appreciation or strengthening relative to other currencies. In contrast, the opposite occurs when there is a trade deficit.

U.S Goods Trade Balance: Monthly, fourth week of the month; time 20:30 UTC+8

U.S Trade Balance: Monthly, first week of the month; time 20:30 UTC+8

Some traders may prefer to focus on technical analysis, which relies on chart patterns to make trading decisions. Other traders may concentrate on fundamental analysis when making their trading decisions. Traders can also combine their different types of analysis to construct an effective trading strategy. Take time to explore these analysis methods and gain a deeper understanding of them. This will enable you to discover an approach that matches your trading styles.