Economic news has a large impact on asset prices. In the short term, even small unexpected changes in some indicators can rock stock prices and cause interest rates to rise or fall. But over the longer term, those effects are generally much less pronounced. In fact, our analysis shows that the market largely shrugs off most economic news—with the exception of inflation reports.
Last month, the Commerce Department reported that producer prices jumped in July, reflecting the higher costs businesses are paying as a result of the Trump administration’s tariffs on imported goods. This increase in costs will be passed on to consumers, which is why consumer price inflation should pick up significantly over the coming months.
But the effect of a change in an indicator on asset prices depends on the type of indicator and how it is measured. For example, an unexpected change in GDP might have a greater impact on bond yields than an unexpected change in inflation. In addition, the timing of the release of the indicator can have a big influence on its impact.
To help address these issues, The Economist, a weekly British business and current affairs magazine, has developed an approach to news analysis that it calls “true news.” The concept is simple: true news is the actual value of an indicator as released, cleaned of measurement errors and information noise that accumulates between the survey and its release. The true news is then compared to the standard measure of news, or measured news, and the asset price response is estimated using an OLS regression.
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