Economic news reshapes expectations about the economy’s state, and this reshaping leads to adjustments in the prices of financial assets. This article explores how different kinds of news affect the price responses of bond, stock, and foreign exchange markets. It finds that only a few announcements–the nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report–give rise to price responses that are economically significant and measurably persistent through the day. These price responses are strongest for bond yields and weakest for stock prices. The direction of these effects supports the idea that expectations about stronger-than-expected growth and inflation generally prompt a rise in interest rates, while expectations about weaker-than-expected growth and inflation generally lead to a fall in stock prices.
The evidence suggests that the standard approach relying on survey data to measure expected market reaction is likely to produce biased estimates of asset price response. The bias stems from the lag between the time of the survey and the release of the data, which means that a substantial amount of information relating to the indicator may have accumulated by the time of its release. This information, which reflects the uncertainty about the indicator’s actual value, is known as “measured news.”
Rigobon and Sack (2008) have developed an estimator for measured news that removes this noise and produces estimates of asset price responses that agree in sign with those produced by the standard OLS methodology. The estimated responses are also typically larger than their standard counterparts.