The key issues for the markets are:
Inflation is what the markets fear most. It eats into investment returns, undermines savings, and if it starts to run away it can only be corrected by severe fiscal belt-tightening which can induce recession.
The government target for inflation is 2.5% p.a. The Monetary Policy Committee of the Bank of England reviews base rates once a month and its mandate is to set them at a level which it thinks will keep inflation in line with this target. Any data which indicates rising inflation or 'overheating' in the economy is interpreted by the City as something which might prompt the MPC to increase interest rates.
Higher interest rates are usually bad for bond prices. They may also be bad for share prices if they result in increased costs of corporate borrowing and lower earnings.
Key indicators:
GDP indicates the total value of all economic activity in a country and, put very crudely, it tells you whether its economy is growing or shrinking.
The best thing from the market's point of view is consistently strong growth - not too rapid, not too slow - after allowing for inflation. GDP figures are released quarterly in arrears.
As an investor, focus on the general trends. Be aware of whether the economy (and not just ours but others too, especially the USA) is regarded by those who are meant to know as being in a boom, a recession or somewhere in between. Economic output is directly related to corporate profits which is directly related to share prices.
Consumer confidence is important because it indicates likely consumer spending and hence gives a clue to future corporate earnings. In general, the City looks for consistent growth. Too little growth is unwelcome for obvious reasons, but so are signs of rampant growth since they might give rise to inflation.
Key indicators:
Anecdotal evidence may be just as helpful as the official figures.
It's not necessary for you to have a permanent fix on commodity prices, but do remember that certain types of business are profoundly affected by how much they pay for raw materials. Oil, cocoa and coffee prices can be extremely volatile and if a business has to pay more for them its competitive and financial position can turn very sharply.
The City knows this, and will mark shares up or down accordingly: Exel, a distribution business, fell 7% on 12.9.2000 because of fears that the fuel crisis would affect its costs and also impact on the service it gave to customers.
As a general rule, if a country has a large trade surplus (exports more than it imports) its currency will be strong. If it has a large trade deficit, its currency will come under pressure. A weak currency makes imports cheap and exports expensive, which will affect different types of business in different ways.
Quote
"When your neighbour loses his job, it's a slowdown; when you lose your job, it's a recession; when an economist loses his job, it's a depression."Book offers!
