What the News Means for Investors
Basic economic thinking leads us to expect certain rela- tionships between economic news and asset prices. For example, investors will be keenly attentive to news that is likely to increase inflationary pressure and prompt the central bank to pursue tighter monetary policy than anticipated. They will also expect to see some relationship between economic news and interest rates, such as yields on Treasury securities or Eurodollar futures.
But not all economic news is created equal. In particular, the quality of economic data can vary considerably — as does the sensitivity of markets to its implications. The latter property is particularly important for interpreting and predicting the response to economic news. In this article, we describe a new method for measuring the impact of economic news on asset prices. This method, which we call the Rigobon-Sack approach, is intended to eliminate the measurement errors that arise when surveys of forecasts are conducted before the actual release of a given indicator.
The method yields estimates of asset price responses that agree in sign with those produced by a standard OLS approach. It also yields estimates that are clean of the informational noise that accumulates between survey time and the actual data release. As a result, the estimated asset price responses per unit of true news are typically larger than those produced by the standard approach.
Producer prices rose 0.4 percent in July, a sharp increase from June and one that suggests tariffs are beginning to push up business costs. That in turn could boost consumer prices, and the Fed’s favorite measure of inflation, the personal consumption expenditures deflator, is currently running close to 4%.
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