Fundamental Analysis is based on the study of factors external to the trading markets, which affect the supply and demand on a particular market. It is opposed to the technical analysis as it focuses, not on currency rates, but on factors like government policies, domestic and foreign
political and economic events and changing trade prospects. Thus, the main sources of
information for fundamental analysis are news and economic indicators.
Latest news is available in the Streamster on the "Latest News" tab and the news articles are collected from different sources on the Internet. By clicking on "Categories" button, it is possible to choose only specific category of news, making it easier for you to focus on topics you find the most useful in trading.
The "Alerts" tab in the Streamster announces market events five minutes before they occur. Market events are divided in two groups: events with high and normal priority. Streamster also has a feature (you can set it in the "Settings" menu, "Pronounce high-priority news, alerts and signals") that allows you to hear alerts narrated aloud.
Economic (business) indicators allow analysis of current and predicted economic performances. Economic indicators include various indices, earnings reports, and economic summaries, such as unemployment, housing starts, Consumer Price Index (a measure for inflation), industrial
production, bankruptcies, Gross Domestic Product, retail sales, stock market prices, money supply changes, etc. The most important ones will be discussed below.
GDP (Gross Domestic Product)
The Gross Domestic Product (GDP) is the sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
The GDP report contains information that gives an image of the overall economy and also tells investors about important trends within the big picture, so it needs to be tracked closely.
The most common approach to measuring and understanding GDP is the expenditure method: GDP = consumption + investment + exports - imports
The broad components of GDP are: consumption, investment, net exports, government
purchases, and inventories. Consumption is by far the largest component, totaling roughly two thirds of GDP.
GDP reports are issued quarterly, thus they affect market in a long period rather than having an immediate effect. The reports are broken down into three announcements: advance, preliminary, and final numbers. After the final revision, GDP is not revised again until the
annual benchmark revisions each July. These revisions can be quite large and usually affect the past five years of data.
Industrial Production is a fixed-weighted measure of change in production of the nation's factories, mines and utilities as well as a measure of their industrial capacity, production and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). Since the manufacturing sector accounts for approximately
one-quarter of the economy in developed countries, this report has a big influence on market behavior.
Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather. Severe hot or cold spells can boost production as increased heating / cooling needs drive utility production up.
Measure of capacity utilization is also provided in this report. Capacity is very difficult to
measure, and it is essentially assumed that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth. Historically, the 85% mark is seen as a key barrier over which inflationary pressures are generated. Utilization rate getting too high (above 85%) can lead to inflationary bottlenecks in production. For example, The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures, in that way greatly influencing Forex market.
In economics, unemployed person is a person who is able and willing to work at prevailing wage rate yet is unable to find a paying job. The unemployment rate is the number of unemployed workers divided by the total civilian labor force (people who are able to work). There are several different methods for measuring the number of unemployed workers. Each method has its own biases and the different systems make comparing unemployment statistics between countries, especially those with different systems, difficult.
The employment report is consisted of actually two separate reports which are the results of two separate surveys: the household survey (produces the unemployment rate) and the establishment survey (produces the non-farm payrolls, average workweek, and average hourly earnings figures, etc.). Both surveys cover the payroll period which includes the 12th of each month. The employment data also provide information on how many people are looking for jobs, how many have them (what they're getting paid and how many hours they are working). These numbers are the best way to picture the current state and future direction of the economy.They also provide insight on wage trends, and wage inflation is high on the list of enemies for the Federal Reserve.
To depicture economy better, total payrolls are broken down into sectors such as manufacturing, mining, construction, services, and government. The market follows these components closely as indicators of the trends in sectors of the economy; the manufacturing sector is watched the most closely as it often leads the business cycle. The data also include breakdowns of hours worked, overtime, and average hourly earnings. The average workweek (also known as hours worked) is important for two reasons. First, it is a critical determinant of such monthly indicators as industrial production and personal income. Second, it is considered a useful indicator of labor market conditions: a rising workweek early in the business cycle may be the first indication that employers are preparing to boost their payrolls, while late in the cycle a rising workweek may indicate that employers are having difficulty finding qualified applicants for open positions. Average earnings are closely followed as an indicator of potential inflation. Like the price of any good or service, the price of labor reacts to an overly
accommodative monetary policy. If the price of labor is rising sharply, it may be an indication that too much money is chasing too few goods, or in this case employees.
By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise and the currency strength will fall.
Jobless Claims represents number of individuals who filled for unemployment insurance for the first time.
It is very easy to see how this factor shows the strength of the market: less people without jobs, there is more income which gives a household spending power. Spending is highly correlated with growth of the economy, so the stronger the job market, the healthier the economy. On the other hand, if the number of job seekers fall to such a low level that businesses have a tough time finding new workers, investors might have to pay overtime to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This would also lead to wage inflation and can weak economy and currency strength.
By tracking the number of jobless claims, investors can gain a sense of how tight the job market is. Lately, there is general problem with unemployment, so the rule is: the lower the number of unemployment claims, the stronger the job market, and vice versa.
Other Important Economic indicators
In the previous section ("Fundamental Analysis.") we explained the usage of Alerts and News Tab in the Streamster and listed four basic Economic indicators: GDP (Gross Domestic Products), Industrial Production, the Employment Report and Jobless Claims.
In this section, we will cover other important Economic indicators that affect economic performance and that can be used to predict future performance: Producer Price Index, Consumer Price Index, Leading Indicators and Consumer Confidence.
PPI (PRODUCER PRICE INDEX)
The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the
manufacturing, mining, agriculture, and electric utility industries for their output.
The Producer Price Index (PPI) measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of incoming inflationary pressures.
The PPI is often used as a leading indicator of consumer inflation in the future, as additional costs of producing goods are often passed on to the consumer in due course.
The consumer price index (CPI) is a related index, but differs in that the CPI measures the price paid by the end users. Other price indexes are sometimes used, for example a labor price index.
The PPI measures price changes in the manufacturing sector. Inflation at this production level often gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. Investors need to monitor inflation closely. Just knowing what inflation is and how it influences the markets can
put an individual investor head and shoulders above the crowd.
As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
CPI (CONSUMER PRICE INDEX)
The Consumer Price Index (CPI) measures the rate of inflation experienced by consumers. The reading represents the monthly change in the average price of a fixed basket of goods and services purchased by consumers. Higher inflation generally leads to higher interest rates,
which tend to strengthen the country's currency.
The Consumer Price Index (CPI) is a measure of the average price level paid by urban
consumers (80% of population) for a fixed basket of goods and services; it also measures the rate of inflation experienced by consumers. CPI reports price changes in over 200 categories and also includes various user fees and taxes directly associated with the prices of specific goods and services.
The CPI is a fixed quantity price index and a sort of cost-of-living index. It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price.
Despite these criticisms, it remains the main inflation index.
CPI EXCLUDING FOOD AND ENERGY
"Core rate" of inflation representing movement in volatile food and energy prices have been introduced. It represents CPI excluding food and energy, however including some other volatile components as apparel, tobacco, airfares, and new cars. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included; income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included.
By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
The Leading Indicators report is a composite index of ten economic indicators that typically lead overall economic activity: - Average workweek of production workers in manufacturing. - Average weekly claims for state unemployment. - New orders for consumer goods and
materials - Vendor performance (companies receiving slower deliveries from suppliers) - Contracts and orders for plant and equipment - New building permits issued - Change in manufacturers unfilled orders, durable goods - Change in sensitive materials prices - Index of stock prices - Money supply - Index of consumer expectations.
The leading indicators series was previously published by The Commerce Department,
however, the collection and publishing of these data is from 1996 done by the non-profit Conference Board, which also produces the Consumer Confidence Index. That increased usefulness of the leading index. Conference Board researchers quickly scrapped two of the old components - the change in sensitive materials prices and unfilled orders for durable goods - and added the interest-rate spread that appears in our list above.
The index of Leading Indicators is designed to predict turning points in the economy such as recessions and recoveries. Of course, even a strong trend like that does not guarantee that a recession will not form over the coming six to nine months. But we can get additional help from looking at the leading index with the coincident index, which is also published by The Conference Board, and alongside a couple of other leading indices.
Like the index of Leading Indicator, Consumer Confidence is a survey conducted by The Conference Board in five thousand households across the country. It pictures consumer attitudes; concerning both the present situation as well as expectations regarding economic conditions. The level of consumer confidence is directly related to the strength of consumer spending.
The index consists of two sub indices - consumers' appraisal of current conditions and their expectations for the future. Expectations make up 60% of the total index, with current conditions accounting for the other 40%. The expectations index is typically seen as having better leading indicator qualities than the current conditions index.