Market responses to actual versus consensus numbers in data releases

As traders and investors one of the important facts you need to get to grips with is the difference between Consensus (sometimes termed “expected”) and actual data. Variations in these can have a profound impact on asset prices and so are often part of your decision-making.  

In financial markets, the “consensus” refers to the average or median expectation of market analysts, economists, or other experts regarding a specific economic indicator or financial metric, such as corporate earnings, or market data that is indicative of economic growth or contraction. 

The “actual data” refers to the real value of that indicator or metric as it is released by the relevant source, such as a government agency or a company.

The market response to the difference between consensus and actual data can vary significantly and depends on several factors:

1. Surprise Factor: The extent to which the actual data differs from the consensus is often referred to as the “surprise.” If the actual data is significantly different from the consensus, it can lead to a stronger market response. A larger surprise could result in more pronounced market movements.
2. Direction of Surprise: Whether the actual data is better or worse than the consensus also matters. For example, if economic data is better than expected it might lead to positive share market reactions, as it indicates a healthier economy. Conversely, worse-than-expected data could lead to negative market reactions. However, it is worth pointing out that this is a little simplistic, as it is the reality that different asset classes may respond in contrary directions.  A prime example of this would be data that impacts positively on the USD (e.g. higher than expected interest rate decision), is likely to have the opposite impact on gold price.
3. Importance of the Indicator: Some economic indicators have a more significant impact on market sentiment and investor behaviour than others. For example, employment numbers, GDP growth, and central bank interest rate decisions are typically closely watched and can trigger significant market movements. Conversely, auto sales numbers as an example. are less likely to impact on the market overall but may impact primary on car manufacturers. Most economic calendars have a grading of market sensitivity to data to help the trader.
4. Underlying Market Sentiment: Market sentiment, which includes factors like investor psychology, risk appetite, and current trends, can influence how traders and investors react to economic data releases. Positive sentiment might mitigate negative reactions to negative surprises, or vice versa. You may hear some market commentators refer to ‘good news’ really being ‘bad news’ for the market.

For example, in an interest rate sensitive environment, strong jobs data, although logically one would assume is good news may mean it is more likely that a central bank is in a more favourable position to raise rates and therefore may have a negative impact on the stock market.

1. Economic Context: Related to the above the broader economic and geopolitical context also plays a role. Market participants might interpret data differently based on prevailing economic conditions, global events, or the current stage of the business cycle.
2. Long-Term vs. Short-Term Impact: The immediate market response to data releases can be volatile and short-lived. However, if the data implies a shift in the underlying economic trajectory, it might have longer-term effects on market trends. Therefore, if a longer-term investor rather than short term trader you will view economic data releases very differently.
3. Sector and Asset Class: Different sectors and asset classes can react differently to economic data releases. For example, currency markets will be particularly sensitive to central bank decisions and interest rate expectations (or those data points which may influence such decisions e,g, jobs data), while equity markets although may fluctuate significantly to the same data are likely to react more strongly to corporate earnings reports.

In summary, the actual market response can include fluctuations in stock prices, bond yields, currency exchange rates, commodity prices, and more. Rapid and significant market movements can occur within seconds of a data release, but these may be short lived. As a trader/investor, recognising that data is unpredictable, there is two key tactics to employ, namely:

1. Ensure you have access to and use an economic data calendar and know earnings dates of stocks you are in, so you have awareness of significant data releases prior to these happening. This means you are able to make judgments about any potential risk management actions you should take.
2. As part of your decision-making process make a judgment as to the potential degree to which data may have on your open positions and take remedial action as required, including portfolio balancing and appropriate position adjustment.

We always discuss the potential and actual impact of economic data both before and after release at our daily LIVE update webinar sessions. You are very welcome to join us every lunchtime (AEST) to get the latest events that may impact on your decision making. Check out our Education Hub for more information.

(Keywords: Market data, economic data.)