When financial markets operate efficiently, the prices of assets will ultimately mirror the state of the wider economy. Macroeconomic data can provide useful insights into the factors that influence the financial markets, but what exactly is macroeconomics? Learn about macroeconomics, what it focuses on and what investors and traders can learn from it.
Macroeconomics studies the fundamental elements of the global economy — the core factors that drive supply and demand for goods and services. Although certain aspects of macroeconomics can be studied individually, considering the wider connections between elements of the economic system can help investors and traders to make better-informed investment decisions.
Tip: A macroeconomic shift could simultaneously have positive implications for the price of one asset and adverse consequences for another.
Macroeconomics definition
Macroeconomics is the study of high-level economic and political variables. It can involve analysing data from a country, region or the wider global economy. More specifically, macroeconomics involves compiling and analysing data from diverse sources. This can provide insights into economic growth or decline, the underlying causes behind these trends, and the potential for future changes in the economic landscape.
Macroeconomics focuses on analysing significant factors, such as interest rates and unemployment levels, which can have substantial influence over economic activity and the financial markets.
Macroeconomic data is often presented as a single, easy-to-identify and trackable number, such as a country’s base interest rate or the percentage of the workforce that is unemployed.
What does macroeconomics focus on?
Although the definitions of macroeconomics may vary, it is widely understood that businesses and political leaders look to foster economic growth, price stability and full employment.
These macroeconomic data points can be assessed using officially sourced reports that track Gross Domestic Product (GDP), the Consumer Price Index (CPI).
Tip: Macroeconomics can be subjective. Economists and investors have differing opinions about which data points should be considered a priority.
There are a range of macroeconomic factors that can influence the likelihood of the above objectives being achieved, including:
- Fiscal policy — the use of government spending and tax policies to influence economic conditions
- Monetary policy — a set of actions to control a nation’s overall money supply
- Geopolitical events — political issues or events involving at least two countries
By diving into macroeconomic data, it is possible to analyse additional factors at a more detailed level, such as supply-side issues, worker productivity, consumer sentiment and social trends. These factors provide valuable insights into the broader economic landscape.
It is better to be roughly right than precisely wrong.
John Maynard Keynes
What can investors and traders learn from macroeconomics?
Reports that offer updates on macroeconomic data are released at specific times, with announcement dates typically published in advance. The more importance is attached to a particular data release, the more attention it will receive from investors and traders.
While macroeconomic factors, such as interest rates, can take time to influence the economy, the moment of their release can lead to heightened short-term price volatility within the asset markets. Traders are usually very quick to adjust their views as to the fair value price of an asset based on newly available information.
Traders employ various strategies when it comes to macroeconomic report releases. Some traders prefer to try and capitalise on these moments, while others actively avoid them. It is important to note that there is a risk of positions being stopped out due to temporary price “whipsaws” — the sudden change in an asset’s price direction.
This can occur when a stop-loss level is triggered by rapid price movements immediately following the release of news, only for the price to subsequently return to its pre-news trading level.
Final thoughts
There is a lot of room for interpretation when looking at macroeconomic data. The global economic system is highly connected and complex, which can lead to unforeseen consequences when macroeconomic factors change. Despite the lack of definitive rules relating to the practice, monitoring macroeconomic reports remains crucial for those investing in the financial markets.
Visit the eToro Academy to learn more about using macroeconomic data.
Quiz
FAQs
- Which asset class is most affected by macroeconomic events?
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Some macroeconomic reports can be expected to influence all asset classes. For example, the US Non-Farm Payrolls unemployment report, released on the first Friday of every month, is a highly anticipated data point that can significantly influence both the stock and cryptocurrency markets. Conversely, other reports, such as those reporting on sentiment among manufacturers, tend to have a more sector-specific impact.
- How can I track macroeconomic events?
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A reputable broker will provide its clients with an Economic Calendar. This is a user-friendly, calendar-based monitor that outlines upcoming events and allows users to filter events by country, region or anticipated level of influence.
- What is the difference between microeconomics and macroeconomics?
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Macroeconomics differs from microeconomics, in that the former involves analysing the actions of a wider population to provide a broader perspective. This could include the total retail sales for an entire economy, for example. On the other hand, microeconomics studies the decision-making processes of individuals. For example, why does a consumer decide to buy one product over another?
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