Ngân hàng, tín dụng - Chapter 29: Tying it all together

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 29 Tying It All Together Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-2 Learning Objectives • Understand the role of economic indicators and their importance to financial markets • Realize the complexities of modern financial markets and their importance to the economy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-3 Introduction • This chapter ties all the concepts together – Markets and instruments – Banks – Central banking – Monetary theory • Discussion of the key economic indicators and how these influence securities prices 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-4 The Economic Indicators • Economic indicators measure economic performance • Some indicators are very important – GDP growth, unemployment and inflation – These embody the ultimate objectives or goals set by the Federal Reserve • However, other economic indicators are more focused on specific measures and provide insight into how the economy is performing Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-5 The Economic Indicators (Cont.) • Table 29.1 and Figure 29.1 – Lists and displays the most important economic indicators with the source of the data and frequency of release – These indicators can also influence the price movement of stocks and bonds – Because of the importance of indicators, traders know exactly when these indicators will be released Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-6 TABLE 29.1 Key economic indicators. 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-7 FIGURE 29.1 Selected economics indicators. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-8 FIGURE 29.1 Selected economics indicators. (Cont.) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-9 The Economic Indicators (Cont.) • Table 29.1 (Cont.) – Understanding how the market reacts to a particular indicator requires a two-step procedure • Understand what the indicator is and its connector to security prices • Understand the way the indicator behaves relative to changes in the economy 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-10 The Economic Indicators (Cont.) • The Employment Report – Compiled monthly by the Bureau of Labor Statistics and the U.S. Department of labor – Contains information on employment, average workweek and hourly earnings – Primary focus from the press is on the unemployment rate and the level of payroll employment – Because this report is released monthly, the employment statistics offer a frequent update on the state of economic activity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-11 The Economic Indicators (Cont.) • The Employment Report (Cont.) – Household Survey • Based on a monthly sample of about 6,000 households • Estimates the unemployment rate based on two questions—1) are you employed, and 2) if not, are you actively looking • The unemployment rate is the ratio of the number of people unemployed to the number of people in the labor force (those working plus those not working, but looking) • Possible bias is a person’s reluctance to admit they are no longer actively looking for a job, but has dropped out of the labor force Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-12 The Economic Indicators (Cont.) • The Employment Report (Cont.) – Establishment Survey • This is the basis for payroll employment • The source of data comes from canvassing business establishments rather than households • Excludes self-employed and domestic workers • Persons who hold multiple jobs can be counted several times 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-13 The Economic Indicators (Cont.) • The Employment Report (Cont.) – Market brokers/dealers place more weight on the payroll numbers compared with the unemployment rate because the measurement problems are less – Both reports are lagging indicators—follow behind changes in overall economic activity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-14 The Economic Indicators (Cont.) • Housing Starts and Building Permits – This report reflects activity in a very important sector of the economy – Housing accounts for more than 25% of the investment component of GDP and 40% of the household budget – This report is a leading indicator—housing increases have a ripple effect in the economy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-15 The Economic Indicators (Cont.) • Housing Starts and Building Permits (Cont.) – Two components to this report • Housing Starts—recorded when excavation begins for a new house or apartment • Building Permits—precedes housing starts since most localities require building permits before excavation begins • Housing starts are about 10% greater than building permits because some localities do not require permits 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-16 The Economic Indicators (Cont.) • Purchasing Management Index (PMI) – Based on a survey conducted by the Institute for Supply Management (ISM) – Consists of six questions about production, orders, prices, inventories, vendor performance and employment – Respondents are asked to characterize each activity as either up, down, or unchanged Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-17 The Economic Indicators (Cont.) • Purchasing Management Index (PMI) (Cont.) – A composite index is formed—A number over 50 represents an expanding manufacturing sector and below 50 implies contraction – This is a coincident indicator meaning that its movements occur simultaneously with economic activity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-18 The Economic Indicators (Cont.) • Index of Leading Economic Indicators (LEI) – A group of 10 components that form the basis for predicting recessions and economic upturns – This index is released each month by the Conference Board – As a general rule of thumb, the LEI turns down before a decline in GDP and turns up before GDP resumes its uptrend 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-19 The Economic Indicators (Cont.) • Index of Leading Economic Indicators (LEI) (Cont.) – Market participants view three consecutive monthly changes in one direction as anticipating a change in economic activity – On average, the LEI seems better in terms of accuracy and lead time in predicting downturns compared with upturns, although neither set of forecasts are all that accurate Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-20 Valuation, The Fed, and Market Reaction • The basic question is: “How do the stock and bond markets react to improvements in each of the economic indicators?” • The final column in Table 29.1 shows the “conventional wisdom” about how prices react to good news about an indicator • In general, good news about any of the indicators related to expenditure drives stock prices up and bond prices down Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-21 Valuation, The Fed, and Market Reaction (Cont.) • Good News Versus Bad News: The Role of Expectations – This would suggest that the stock market should go up if GDP goes up – However, the important issue is not whether it goes up, but how the movement relates to the expectations in the market – Upward movements that are larger than expected will generally increase stock prices, whereas movements upward less than expected will tend to lower stock prices 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-22 Valuation, The Fed, and Market Reaction (Cont.) • Good News Versus Bad News: The Role of Expectations (Cont.) – If the expectations are fully realized, there should be no change in stock prices since the market has already fully discounted the movement in GDP – Thus markets react only to unanticipated news— only to new news Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-23 Valuation, The Fed, and Market Reaction (Cont.) • Good News Versus Bad News: The Role of Expectations (Cont.) – The LEI, for example is mostly old news because most of the component indicators have been released earlier – Some indicators are less reliable than others because they are subject to substantial future revision – An indicator that is less vulnerable to revision will be more powerful in moving the market Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-24 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations— A Refresher – To understand why stocks and bonds react in opposite directions with unanticipated news in the economy, need to reflect on the basics of bond and stock valuations – These concepts were covered in chapters 4 and 8, respectively, and are reviewed below 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-25 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations—A Refresher (Cont.) – Bond Prices • Assume a ten-year zero-coupon government bond with a face value of “F” • Therefore the bond price is as follows: Bond Price = F/(1 + r)10 Where “r” = the yield on 10 year government bonds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-26 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations— A Refresher (Cont.) – Bond Prices (Cont.) • Since the numerator in the formula (F) is a fixed obligation, bond prices will decline with increase in interest rates (r) • What causes movements in the yield on 10 year government bonds? • An expanding GDP and expectations of increasing future inflation will cause an increase in “r” Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-27 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations—A Refresher (Cont.) – Bond Prices (Cont.) • In addition, The Federal Reserve may elect to tighten monetary policy to restrain inflation which drives up interest rates through the term structure of interest rates • Higher interest rates means that the future cash flow from the ten-year bond will be discounted at a higher rate • Therefore, fears of emerging inflationary pressure plus concern that the Fed will drive up the federal funds rate will decrease the value of the ten-year zero-coupon bond 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-28 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations— A Refresher (Cont.) – Stock Prices • Assume a stock paying out all of its earnings in dividends (D) and that these cash flows will last forever • These cash flows are discounted at a rate (k) which consists of the risk-free rate plus an adjustment for the riskiness of the stock • Therefore the stock price is as follows: – Stock Price = D/k Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-29 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations—A Refresher (Cont.) – Stock Prices (Cont.) • Valuation of stocks is more complicated since good news will likely affect both the numerator and denominator of the formula • The denominator behaves as it does in the bond formula, good news will increase interest rates which lowers value • However, good news about the economy means that companies will earn more, implying they will pay higher dividends in the future Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-30 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations—A Refresher (Cont.) – Stock Prices (Cont.) • This indicates that the numerator will increase with good news, driving up the value of the stock • Thus in the stock valuation formula there are two effects which work in opposite directions • Which one of these effects dominates--Conventional wisdom on Wall Street is that the effect on the numerator is usually stronger than the denominator, so that stock prices rise on good news 11 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-31 Valuation, The Fed, and Market Reaction (Cont.) • Stock and Bond Valuations—A Refresher (Cont.) – Figure 29.2 • Summarizes the effects of goods news on stocks and bonds and the linkages just discussed • One notable departure from the pattern that stocks and bonds move in different directions is the reaction to inflation • Unanticipated good news about inflation (lower than expected) drives the interest rate down and has a positive effect on both the stock and bond market Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-32 FIGURE 29.2 Economic indicators and market behavior. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-33 Putting It All Together • Economic indicators are at the center of a feedback mechanism operating through economic activity, economic policy, and investor behavior • These indicators measure how the economy is currently performing and suggest how it will perform in the future 12 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-34 Putting It All Together (Cont.) • Investors, forecasters, and analysts all observe the indicators and make assessments about the future—mainly future dividends and interest rates • Because the Federal Reserve monitors the economy through these indicators, favorable or unfavorable news can alter monetary policy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 29-35 Putting It All Together (Cont.) • Can individual investor make money on newly released economic indicators—buying stocks and selling bonds on good news or vice-versa – Hinges on the “newness” of news—by the time we read about an economic indicator, it is old news – Professional stock and bond brokers/dealers probably see the “new” news immediately after the indicators are released and act accordingly – U.S. economy is intertwined with international events which impact domestic economic activity