How Markets Process Macro News: The Importance of Investor Attention

I provide evidence that investors' attention allocation plays a critical role in how financial markets incorporate macroeconomic news. Using intraday data, I document a sharp increase in the market reaction to Consumer Price Index (CPI) releases during the 2021-2023 inflation surge. Bond yields, market-implied inflation expectations, and other asset prices exhibit significantly stronger responses to CPI surprises, while reactions to other macroeconomic announcements remain largely unchanged. The joint reactions of these asset prices point to an attention-based explanation–an interpretation I corroborate throughout the rest of the paper. Specifically, I construct a measure of CPI investor attention and find that: (1) attention was exceptionally elevated around CPI announcements during the inflation surge, and (2) higher pre-announcement attention robustly leads to stronger market reactions. Studying investor attention in the context of Employment Report releases and Federal Reserve announcements, I document a similar importance of attention allocation for market reactions. Lastly, I find that markets tend to overreact to announcements that attract high levels of attention.