Next time you step into your local coffee shop try to count the number of times that you hear the acronyms GDP, CPI and PPI mentioned. Not a lot, right? Yet capital markets tend to move, sometimes sharply, when economic data (GDP, CPI, etc.) is released. It is no coincidence that certain economic indicators are often called "market-moving indicators". Investors might not talk about economic news, but they do care.

There are eleven market-moving indicators: the Consumer Price Index (CPI); Durable Goods Orders; Employment Report; Federal Open Market Committee Meetings Announcements; Gross Domestic Product (GDP); Housing Starts; Industrial Production and Capacity Utilization; International Trade; ISM Manufacturing Index; Personal Income and Outlays; Producer Price Index (PPI) and Retail Sales. Space is limited so I will only address those indicators that receive the most attention from investors.

Before we go any further we need to understand a fundamental feature of capital markets. Both the bond and equity markets reflect investors' expectations about the future - expectations about corporate profitability, interest rates, inflation, unemployment rate, economic output, etc. The constant flow of economic data confirms or negates investors' expectations about the future, triggering buy and sell decisions, which in turn leads to market movements.

The U.S. Department of Commerce defines GDP as "the market value of goods and services produced by labor and property in the United States". It is the country's most comprehensive economic scorecard. GDP is commonly calculated as the sum of expenditures in the following four categories:

• Personal consumption
• Private investment
• Government
• Net exports

Equity investors like to see how the economy is performing because a strong economy leads to higher corporate profits. The bond market does not dislike growth but is extremely sensitive to an economy that is growing faster than its potential (i.e. "overheating"), which leads to inflation and higher interest rates.

However, the devil is in the detail. Final sales expenditures are monitored to determine whether they are growing faster than inventories, pointing to future increases in production (economic expansion), or slower than production, leading to a slow-down in production (economic contraction). Investors generally discount growth in government expenditures, as these depend on fiscal policy, not economic conditions. An increase in investment expenditures bodes well for investors because expanding the productive capacity of the country reduces inflationary pressures (i.e. keeps interest rates low). Net exports tend to reduce GDP as the U.S. tends to import more than it exports. An increase in the trade deficit, therefore, impacts GDP negatively.

GDP figures are reported quarterly, for the previous quarter, by the Commerce Department. Due to quarter-on-quarter volatility it should be analyzed on a year-over-year basis, when analyzing economic trends.

The CPI is the most widely followed monthly indicator of inflation (general increase in the price of goods and services). Both the bond and equity markets will rally when increases in CPI are low as low inflation keeps interest rates low.

The CPI is volatile from month to month, due to its food and energy components. As a result financial markets prefer to monitor "core" CPI (i.e. CPI without food and energy prices).

The Employment Report is the primary monthly indicator of total economic activity because it encompasses every major sector of the economy. It is available early in the month. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. In short, it provides clues about other economic indicators reported for the month and plays a big role in influencing financial market psychology during the month.

Low unemployment can lead to a "tight" labor market (i.e. scarcity) that in turn will lead to inflation and a rise in interest rates. Labor market weakness may cause both the bond and equity markets to rally. It should be noted, however, that during periods when the economy is expected to recover from recession or downturn equity markets may actually rally on news that the employment situation is improving, as confirmation that an economic recovery is underway.

Retail sales are a major indicator of consumer spending trends as they account for nearly one-half of total consumer spending and approximately one-third of aggregate economic activity.

Strong retail sales may eventually lead to inflationary pressures. Strong data is bearish for the bond market but can be favorable for the stock market, particularly retail stocks - as long as stock investors feel that inflation remains under control, as indicated by the Producer and Consumer Price Indexes.

Volatility in month-to-month data is mitigated by removing auto sales as motor vehicle sales fluctuate more than overall retail sales.

Investors base their investment decisions on economic indicators because they reflect the direction of current and future economic activity. When listening to the business news pay close attention to these monthly and quarterly indicators because the numbers do matter.

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