Economic news causes markets to reassess their views of the economy’s current state and future evolution. The nature and extent of this response varies with the type of news, but generally speaking, small unexpected changes in economic indicators tend to rock asset prices (stocks, bonds, and foreign exchange rates) over time, while other changes—however large or surprising—are largely shrugged off. Moreover, some indicators generate responses that are economically significant and measurably persistent over the business day; for example, yields on U.S. Treasury securities and Eurodollar futures rise in response to stronger-than-expected inflation or growth.
Earlier studies of the effects of economic news defined their news measures with respect to forecasts, an approach that made the resulting asset price responses highly dependent on the specific model chosen for forecasting. To remedy this problem, Rigobon and Sack developed a method that decomposes the expected change in an indicator into its component parts—or “true news”—and then estimates asset prices’ responses to each piece of true news. This approach produces estimates of the impact of news that agree in sign with those produced by a standard OLS approach.
The results of their study of the effects of economic news on key assets suggest a number of important lessons. First, only a few announcements—notably nonfarm payrolls, the GDP advance release, and a private sector manufacturing report—give rise to asset responses that are economically significant and measurably persisting through the business day. Second, the strongest effects are found in bond yields and the weakest in stock prices.