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.

The U.S. government and some private organizations 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 participants reassess their views of the economy’s current condition and its likely future evolution.

Naturally, the nature and extent of the market response will vary with the announcement. Small unexpected changes in certain economic indicators may rock asset prices1 over a long period, while shifts in other indicators—however large or surprising— are quickly shrugged off by the markets. Moreover, while announcements about some economic indicators affect bond yields and exchange rates, news about others may chiefly affect stock prices.

To explore this variety of responses, a substantial body of research has emerged in recent years, spurred by the increasing availability of “high-frequency” data on asset prices—data reported at one-minute or even shorter intervals. In this edition of Current Issues, we draw on such high-frequency data to review and illustrate some of the key patterns that researchers have observed in market reactions to economic releases.

Specifically, we track how announcements of thirteen economic indicators affect prices in three broad asset classes—bonds, stocks, and foreign exchange—over a ten-year period ending in 2007. In doing so, we focus on the market’s reaction to the part of each announcement that is actually news. By “news,” we mean the surprise element, or the difference between the actual value announced for an indicator and market participants’ prior expectation of what that value would be. ...

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.

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Volume 14, Number 6. August 2008
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Conclusion:
Our analysis, based on recent data from a large archive of economic news releases and high-frequency asset prices, distills some lessons about the response of financial markets to economic news. In line with much of the earlier research, our study suggests that only a handful of economic announcements—those contained in the Employment Situation Summary, GDP advance release, and ISM Manufacturing Report—affect asset prices in significant and systematic fashion, while most other releases tend to generate erratic or insignificant price responses. The strongest impact of these announcements is on interest rates and the weakest is on stock prices. Asset responses for the most part show the same patterns of sign and magnitude over different intraday intervals, and generally support the view that asset prices rise in response to news of positive growth and faster inflation. However, researchers and practitioners seeking a reliable basis to analyze the impact of economic news on financial markets will find the immediate impact to be more precisely measured than the full-day impact.

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