Foundations · F10 · 8 min
How data moves markets
Measure a data surprise, size the market move it should cause, and say which way interest rates, currencies and shares go.
In the news: Inflation and jobs figures, when one number can move interest rates, currencies and shares within seconds.
The essentials
- Consensus and the surprise
- Prices already reflect the , the average of economists’ forecasts, so markets react to the surprise: the actual figure minus consensus. A figure in line barely moves anything.
- Sizing the surprise
- Scale it by the release’s usual miss, then by the usual move: a 0.2 beat where misses are about 0.1 is two standard deviations, and at 6bp each that suggests about 12bp on 2-year .
- Reaction function
- The link from data to what the central bank is expected to do. Hot inflation lifts short-term interest rates first and most; the currency tends to rise and shares to fall.
- Bad news can be good news
- The sign depends on what markets fear most. With inflation the worry, weak jobs figures can lift shares by bringing rate cuts closer; with recession the worry, the same figures hurt them.
- Priced in and positioning
- A move everyone expects is and barely shifts prices. Crowded makes a surprise bigger, as investors holding the same bet get out together.
- Read past the headline
- Find the part the central bank reacts to. Inflation that beats on petrol while services inflation is soft is less hot than it looks; jobs growth that beats while earlier months are revised down is weaker.
Sizing a data surprise
z = (actual − consensus) ÷ σ; move ≈ sensitivity × z
- σ
- the usual size of surprises in this release (their standard deviation)
- z
- the surprise in standard deviations
- sensitivity
- the typical move per standard deviation, such as bp of 2-year yield
How it works
1. The forecast is already in the price
Before a figure comes out, economists’ forecasts are averaged into a , and market prices already reflect it. If inflation comes in exactly at consensus, little moves. Markets react to the surprise: the actual figure minus consensus.
2. How big is the surprise
A 0.2-point miss can be huge for one release and ordinary for another. So traders divide the surprise by the usual size of surprises in that release. Consensus 0.3%, actual 0.5%, usual miss 0.1: a surprise of 2 standard deviations.
3. Sizing the move
If 2-year yields usually move 6 (0.06%) for each standard deviation of surprise, a surprise of 2 suggests a move of about 12. A much bigger move means something else is going on, such as a revision or a .
4. Through the central bank
Hot inflation makes rate rises more likely, so short-term interest rates rise first and most, as markets expect a higher . The link from data to what the central bank is expected to do is its .
5. Into currencies and shares
Higher expected rates make a currency more attractive to hold, so it tends to rise. Shares tend to fall, because higher rates make future profits worth less today. A soft inflation figure does the reverse.
6. Bad news can be good news
When inflation is the worry, weak jobs figures can lift shares, because they bring rate cuts closer. When recession is the worry, the same figures hurt shares, because profits are at risk. The sign depends on what markets fear most.
7. Priced in and crowded
A rate cut everyone expects is and barely moves prices. And if many investors hold the same bet before a release, a surprise forces them out together, making the move bigger. How investors are placed is their .
8. Read past the headline
Inflation that beats because petrol jumped, while services inflation is soft, is not as hot as it looks. Jobs growth that beats while earlier months are revised down is weaker than it seems. Find the part the central bank will react to.
Worked example
US core inflation is forecast to rise 0.3% on the month, and surprises are usually about 0.1. It comes in at 0.5%. Two-year yields usually move 7bp per standard deviation, and the dollar about 0.3%. (Illustrative sensitivities.)
- Surprise: 0.5 − 0.3 = 0.2.
- In standard deviations: 0.2 ÷ 0.1 = 2.
- 2-year yields: 7bp × 2 = about +14bp.
- Dollar: 0.3% × 2 = about +0.6%.
- Shares: likely lower, as rate cuts are priced out.
A surprise of two standard deviations: roughly +14bp on 2-year yields and +0.6% on the dollar, with shares lower.
Check yourself
8 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Inflation came in hot this morning. Talk me through what you’d expect across assets.
Why do markets sometimes rally on bad news?
Which release this week matters most for your asset class?
Remember
Move ≈ sensitivity × surprise in σ
Markets move on the surprise against consensus, filtered through what the central bank will do about it.