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Interpreting Market Responses to Economic Data

Author

Listed:
  • Patrick D'Arcy

    (Reserve Bank of Australia)

  • Emily Poole

    (Reserve Bank of Australia)

Abstract

This article discusses how bond, equity and foreign exchange markets have responded to the surprise component of Australian and US macroeconomic data announcements over the past decade. The bond and equity market responses are used to infer changes in market expectations for interest rates and dividend growth rates. Both interest rates and expected dividend growth rates are shown to increase by a similar magnitude in response to upside inflation and employment surprises. The estimated changes in the interest rate and expected dividend growth rate differentials between Australia and the US are also compared with the exchange rate response to data surprises. This allows an assessment of the relationship between expected economic fundamentals and the exchange rate.

Suggested Citation

  • Patrick D'Arcy & Emily Poole, 2010. "Interpreting Market Responses to Economic Data," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 35-42, September.
    • Handle: RePEc:rba:rbabul:sep2010-05
    as

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    File URL: https://www.rba.gov.au/publications/bulletin/2010/sep/pdf/bu-0910-5.pdf
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    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Beechey, Meredith J. & Wright, Jonathan H., 2009. "The high-frequency impact of news on long-term yields and forward rates: Is it real?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 535-544, May.
    3. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, April.
    4. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
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    Cited by:

    1. Ewan Rankin & Muhummed Shah Idil, 2014. "A Century of Stock-Bond Correlations," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 67-74, September.

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