Economic news causes investors to reassess their views about the economy’s current condition and future prospects, leading to adjustments in the prices of financial assets. In this article, the authors explore how news from various sources affects asset prices on key markets: stocks, bonds, and interest rates. They find that only a few economic announcements–including nonfarm payroll data, the GDP advance release, and a private sector manufacturing report–give rise to asset price responses that are economically significant and measurably persistent through the day. The most persistent effects are observed in bond yields, while stock prices are less responsive.
For instance, the news that inflation is picking up is likely to lead to higher interest rates, because it increases the likelihood of an aggressive response by central banks. Inflation also tends to increase the prices of commodities, which in turn pushes up the prices of agribusinesses and manufacturers that produce them. In turn, that boosts corporate profits and so lifts corporate stock prices.
Earlier studies of economic news typically measured its impact by looking at how changes in asset prices and yields respond to the results of an empirical forecasting model. The problem with this approach is that it makes the resulting measures highly dependent on the model chosen to generate the forecasts. So, a finding that news has only a small or muted impact on asset prices might actually reflect the choice of an inadequate forecasting model. Survey-based measures of market expectations, such as those derived from macroeconomic survey data, offer an alternative way to measure the impact of news on asset prices.