For the example given in the school, I don’t understand the concept fully. (example below - {[High School], Market Expectations of News and Their Impact on Currencies}
Let’s take the monthly Non-Farm Payroll (NFP) as an example.
As stated, this report comes out monthly, and usually included with it are revisions of the previous month’s numbers.
We’ll assume that the U.S. economy is in a slump and January’s NFP figure decreases by 50,000, which is the number of jobs lost. It’s now February, and NFP is expected to decrease by another 35,000.
But the incoming NFP actually decreases by only 12,000, which is totally unexpected.
Also, January’s revised data, which appears in the February report, was revised upwards to show only a 20,000 decrease.
Q#1: Why is February’s previous data -20,000 when in January it was -50,000?
Q#2: How would you interpret the February news release of -12,000 when the previous was -20,000; is that bullish or bearish?
Q#3: When they say “priced in”, does that mean they already place their trades ahead of the news release?
IMO, by the time you get a look at it and other economic data, the market has already been adjusted by the financial institutions, albeit a reduction in jobs lost in this scenario is a ‘bullish’ item. More likely to affect stock markets than currencies.
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When they say “priced in” does that mean they placed their trades before the news release?
The term priced in refers to the rates charged for instruments that have a forward price components. Those include, but aren’t limited to swaps, forwards, options/futures contracts, etc.
For e.g. the JPY gaining in strength the last few days of the prior week were attributed to the markets pricing in a rate hike by BOJ, despite no release or indication of any such news in the media of anything like that. This was noticed in the overnight index swap rate for the JPY.
It means that the market traders have taken positions that includes either a positive or negative movement depending on the economic data.
Not true. If you read the actual economic release documents like the NFP reports released by the BLS there are strict guidelines to release the data by specific dates & times. We get to see most of the financial data the same time the market players do. This is also true for Central bank releases and their MOMs.
This is why markets react as violently as they do when key economic events are released.
Apologies for being cynical - that’s what age does to me. I would suggest that ‘insider knowledge’ is rampant in this industry, like many others. It’s naive to think that everyone on the planet only gets a look in on the release date, despite rules and regulations to the contrary. The rationale of violent reactions is merely for the retail traders, while the financial pros have already built it into their postions - and it’s a double profit for them.
Why? Money and favours owed are rife corruptions of ‘only a need to know basis’ . That’s why you cannot get a free lunch invite.
I don’t think it’s naive because the charts consistently demonstrate otherwise. To me, atleast, that’s evidence that we are all getting economic news data at the same time.
Honestly there’s no evidence that economic news releases are being shared. I don’t believe that’ the case at all. That’s because there’s little evidence to support it. It’s just an assumption that most of us have because as a whole we don’t know how to interpret the data and the market’s reaction to it. The prices we we see move as much for them as it does for us IMO. Here are a few reasons off the top of my head:
- If it were as conspiratorial we’ve have known about it in an age where retail traders have access to power trading tools like the Bloomberg Terminal or the Refinitiv platforms. Even folks who have access to data on interbank terminals and post it on YT now.
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Retail trading is a drop in the bucket compared to the money moved as a result of global trade. We are <10% of total traded volume. Our money isn’t worth as much to banks as much as we make it out to be. It’d be cost inefficient of them to try to design systems and methods just to fleece us off their money. Not when, as a whole, we do a pretty good job losing our own money because of poor discipline and a quick rich scheme mentality.
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If they were being looked at earlier we’d know. That’s because there are too many regular people working in risk management departments in the many companies & large institutions worldwide that rely on forward prices. If an overnight swap or future contracts were priced in much earlier we’d also know as retail traders.
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There would be insider information being exchanged about which institutions are placing what trades and when. Atleast it was more prominent atleast until 2 decades ago. Should be the same now. That doesn’t hold true for economic releases. That is why the markets were caught off guard when the FED hike rates to 75 because the consensus was 50bp. The WSJ speculated a 75bp hike before it happened but folks weren’t willing to price it in based on one source.
This article makes a mention of that analysis of that sentiment among the trading community.
As for the US stock indices felling frisky because the threat of recession is expected to tame the raging Fed, the CME FedWatch tool does not back up that story, at least not near-term. As of this morning, 92.7% of traders expect the full Monty, i.e., 75 bp. Only 7.3% expect the Fed to back down to 50 bp.
To be fair, expectations baked into the farther-out FOMC’s have indeed lessened a bit. A week ago, 46% expected to see 3.50-3.75% by December. That has now fallen to 41%. A month ago, it was zero. Folks who follow this say that drop demonstrates the expectation of a newly wavering Fed.
Source:
I’m sure there is insider information being shared for a number of things. As is the case for any person working in any specialist industry. They just get to know certain news events faster by virtue of where they work. They can afford to pay crazy money for breaking news and vital data feeds. I don’t think it’s as nefarious as we make it out to be.
I would say this is more of a stocks trading concept but I think it’s more about the impact of upcoming news events being already reflected in the current prices, highly driven by market anticipation. 
So, a few days before the event happens, you will already see its impact. By the time it actually happens, you would barely see similarly big movements.