The Impact of Economic News on Stock Prices and Yields

Economic news is a constant source of surprise in financial markets, and the impact of these surprises on prices and yields may be quite large. However, the size of this impact depends on how surprising the data actually are and how many other surprises market participants are facing at that time. For example, very small unexpected changes in certain economic indicators rock asset prices over long periods, while other shifts are shrugged off by the markets. Similarly, news about some economic indicators generates strong effects on bond yields and exchange rates, while others have only a limited effect on stocks.

The authors explore the nature of these relationships using a new methodology that cleans the impact of survey-based measures of market expectations of an indicator release from measurement errors and other sources of informational noise that accumulate over time between the survey and the actual release of the indicator. This approach, described by Rigobon and Sack (2008), yields estimated asset price responses that agree in sign with those obtained with the standard approach, but which are typically much larger in magnitude.

The results suggest a number of important lessons. First, only a few economic announcements—nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report—give rise to asset price responses that are economically significant and measurably persistent across different intraday intervals. Second, these significant responses generally support the view that asset prices rise in response to expectations of stronger growth and faster inflation. Finally, the strongest effects are seen in interest rates, while those on stock prices are weaker and more erratic.