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VOL. 12, NO.

8 JULY 2017
DALLASFED

Economic
Letter
Impact of Macroeconomic Surprises
Changed After Zero Lower Bound
by Christoffer Koch and Julieta Yung
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T
ABSTRACT: Macroeconomic he Federal Reserves Federal The impact of macroeconomic sur-
Open Market Committee prises on asset prices changed during
surprises involving the ZLBin terms of composition and
meets eight times a year in
employment and inflation Washington to set monetary importancedomestically and interna-
reflecting the Feds attempts policy. Regional Federal Reserve Banks tionally.2 Domestic financial markets put
to achieve its dual mandate to and the staff of the Board of Governors a greater focus on indicators depicting
produce economic forecasts for each of the housing sector, which had led to the
promote full employment and recession and inhibited the recovery.
these meetings. Projections are updated
price stabilityincreased in based on macroeconomic data releases Additionally, there was added interest
importance during the zero- during the intermeeting period. in news directly related to the Feds dual
lower-bound period. Also, These periods usually feature one or mandateto promote full employment
two employment reports, vintage releas- and price stabilitysuch as initial jobless
market participants were more claims and Consumer Price Index (CPI)
es of gross domestic product (GDP),
attentive to housing market inflation data such as producer and con- inflation.
indicators and final GDP sumer prices and other macroeconomic In light of this new environment, it
revisions. indicators that yield new information is important to study how markets react
about the health of the U.S. economy. to updates on the state of the economy.
Thus, macroeconomic announcements Interest rate futures provide a view of
play an important role in updating poli- expected domestic conditions, while
cymakers and the publics assessment of exchange rate futures offer a global
the U.S. economy. perspective on the U.S. outlook. In each
The conduct of monetary policy case, our analysis relies on a comparison
changed substantially in the aftermath of intraday asset prices following U.S.
of the global financial crisis. The Feds macroeconomic surprises.
typical pre-2009 policy instrument was The ZLB period was very different from
adjustment of the federal funds rate. the previous monetary policy regimes in
After the downturn, policymakers set the terms of the nature of Fed policy commu-
federal funds rate at near zerothe zero nication and policy setting itself. It brought
lower bound (ZLB)and the Feds mon- the introduction of unconventional quan-
etary policy statements about the path titative tools to stimulate the economy.
of interest rates became more explicitly The tools included quantitative easing
linked to the anticipated evolution of increasing the money supply by purchas-
inflation and unemployment, known as ing Treasuries and mortgage-backed
forward guidance.1 securities and the maturity-extension
Economic Letter

program, with the Federal Reserve shifting than the 245,000 jobs expected in the a decline in their implied interest rates,
its balance-sheet holdings of Treasuries to Bloomberg expectations survey. Payroll as well as a depreciation of the U.S. dollar
longer-term debt. figures are subject to sometimes sub- within a very tight time interval around
stantial adjustment. The report included the announcement (Charts 1 and 2).
Reacting to Disappointing News a revision of the previous two reporting Because the employment data release
The April 3, 2015, unemployment months. With those changes, the actual was likely the only new information com-
report illustrates a reaction to disap- overall negative surprise grew from ing out during this very short time peri-
pointing news. The statement, detailing 119,000 to 188,000 jobs. od, these price responses illustrate the
March activity, reported that the econ- This development led to an increase reaction of interest and exchange rates to
omy added 126,000 jobssharply lower in Treasury note futures prices and, thus, employment report surprises.

Macroeconomic Surprises
Chart The impact of a macroeconomic

1 Treasury Futures Rise After Employment Report Disappoints surprise can be viewed in terms of the
difference in an assets price after an
Index, 7:30 = 100 announcement and its expected value
101.5 prior to the actual release of informa-
Nonfarm payroll report
(7:30 a.m. April 3, 2015) tion. Although it is difficult to measure
30-Year Treasury
10-Year Treasury
market expectations, they can be proxied
101.0
5-Year Treasury by financial instruments that are set to be
2-Year Treasury traded in the future and, thus, incorpo-
100.5 rate market expectations.
Another way to infer what markets
100.0
expect prior to a particular macroeco-
nomic announcement is to directly ask
investors what they anticipate before the
99.5 data are published. To this end, a variety
U.S. central
of data aggregators and news outlets sur-
time zone
99.0 vey market participants leading up to the
0:40 2:00 3:20 4:40 6:00 7:20 8:40 10:00 release. Where significant, the difference
between the survey response and the
NOTES: The dashed line indicates the exact time the unemployment report was released. Treasury futures prices
immediatly increased, indicating lower yields at different maturities, as disappointing news in the U.S. labor market was
actual news report, or surprise, can be
announced. interpreted as an update on the state of
SOURCES: Tick Data; Bloomberg. the U.S. economy.3
The response of 10-year Treasury
Chart futures prices and currency futures using

2 U.S. Dollar Depreciates After Employment Report Disappoints intraday data within a 15-minute sym-
metric window around the exact time
Index, 7:30 = 100 of the release of macroeconomic news
captures the markets reaction to the
101.5 Nonfarm payroll report
Euro surprise. Although markets respond to a
(7:30 a.m. April 3, 2015)
Japanese yen variety of news in a given day, consider-
101.0 Australian dollar ing the change in asset prices 15 minutes
Canadian dollar
before and after data are made public
British pound
100.5 helps narrow down the responses to spe-
cific announcements.
The analysis requires a regression of
100.0
price changes in 10-year U.S. Treasury
note futures and currency futures on
99.5 macroeconomic surprises during two
U.S. central subsamplesbefore the ZLB (1996
time zone
99.0 2008) and during the ZLB (200916).
0:40 2:00 3:20 4:40 6:00 7:20 8:40 10:00 Foreign-exchange futures are expressed
in U.S. dollars so that an increase in the
NOTES: The dashed line indicates the exact time the unemployment report was released. Currency futures prices exchange rate indicates a depreciation of
immediatly increased, indicating a decpreciation of the U.S. dollar relative to other currencies as disappointing news in the
U.S. labor market was announced. the U.S. dollar relative to a foreign cur-
SOURCES: Tick Data; Bloomberg. rency. The surprises are normalized to

2 Economic Letter Federal Reserve Bank of Dallas July 2017


Economic Letter

have a unit standard deviation, and coef-


ficients are in basis points to make the
Chart

3 10-Year Treasury Futures Respond to U.S. Macroeconomic News


results comparable.

What News Matters? Housing: Existing-home sales


Housing: Housing permits Pre-2009
Chart 3 shows the impact of 21
Housing: Housing starts Post-2008
macroeconomic surprises and how Housing: New-home sales
their characteristics changed when the Initial jobless claims
federal funds rate reached the ZLB. The Nonfarm payrolls
Real GDP growth: Advance
horizontal bars display the responses of Real GDP growth: Second
10-year Treasury futures prices to macro- Real GDP growth: Final
economic surprises. In general, positive Inflation: Consumer Price Index
Inflation: Producer price index
surprises tend to decrease futures prices
Personal income
and, thus, most estimates are to the left Personal spending
of the vertical zero line.4 Retail sales
Meaningful changes related to the Consumer confidence
Consumer sentiment: Preliminary
Feds dual mandate appear at the ZLB. Consumer sentiment: Final
On the inflation side, CPI surprises have Industrial production
no significant impact on asset prices Durable goods orders
Factory orders
before 2009. In contrast, during the ZLB
ISM manufacturing index
period, a hypothetical CPI release that
comes in one standard deviation higher 30 25 20 15 10 5 0 5 10
than anticipated lowers the 10-year Magnitude of response (basis points)
futures price 4.7 basis points. NOTES: Horizontal bars display the responses of 10-year Treasury futures prices to normalized macroeconomic surprises,
On the employment side, initial with the black spikes indicating a one-standard-error confidence band for each estimated response before (blue) and
during (orange) the zero lower bound. Positive surprises tend to decrease future prices and, thus, most estimates appear
jobless claims appear to become more to the left of the vertical zero line. ISM is the Institute for Supply Management.
important; at the same time, standard SOURCE: Authors calculations.

signals of labor market activity are


less definitive. To be sure, it is unclear related to manufacturing activity such as the euro is much more sensitive to U.S.
whether headline figures such as the durable goods orders, factory orders and macroeconomic surprises before than
unemployment rate and nonfarm pay- industrial production weakens. after the ZLB. This may reflect a shift in
roll growth are able to sufficiently depict This could reflect ongoing structural the business cycle following the global
labor market imbalances. change but is more likely related to financial crisis. While the recovery in the
Indeed, the Fed dropped its refer- the financial-crisis-related realization U.S. was well underway, the euro area
ence to the unemployment rate in later that macroeconomic vulnerabilities remained on its path to recovery; news
forward-guidance monetary policy state- were associated with households bal- from across the Atlantic might have been
ments. The weaker impact from nonfarm ance sheets and the financial system. of second-order importance during the
payroll surprises and the simultane- Reflecting these changes, some housing U.S. recovery.
ously released unemployment rate may releases became more important during This was not necessarily the case for
be a result of uncertainties regarding the ZLB. other foreign currencies. In fact, there
the significance of secular demograph- New- and existing-home sales retain is more sensitivity to U.S. surprises in
ics on labor force participation rates.5 their relevance in both periods. However, Japans and Canadas currency responses
The severity of the economic downturn during the ZLB, all four housing indica- post-2008. The effects of two flash sur-
induced unprecedented movement in torsincluding housing starts and the vey indicators, the Conference Boards
measures of underemployment that are more-leading indicator, housing per- Consumer Confidence Index and the
more encompassing than the headline mitsdepressed Treasury futures prices, Institute for Supply Managements man-
unemployment rate. This also affected implying higher future yields. The hous- ufacturing index, are softer domestically
headline unemployments potential sig- ing bust triggered the near-collapse of and internationally after 2008 and, inter-
naling value. the financial system in the recession and estingly, depreciate the dollar against
The informational content of the final constrained aggregate spending during the currencies of commodity exporters
readings of previous-quarter U.S. GDP the recovery, refocusing investors atten- Canada and Australia. Retail sales exhibit
appears larger in the ZLB era. Positive tion on these housing-related indicators. similar behavior.
final-revision surprises of quarterly GDP
contain enough new information to move International Focus Understanding Financial Markets
Treasury futures prices down (and 10-year Exchange rate futures tend to be Intraday asset price responses to
rates up) but only during the post-2008 relatively less sensitive to U.S. macro- macroeconomic surprises tell us how
period. Conversely, the effect of surprises economic news (Chart 4).6 Interestingly, markets interpret the unexpected

Economic Letter Federal Reserve Bank of Dallas July 2017 3


Economic Letter

Notes
Chart 1
Motivated by the increased importance of macroeco-
4 Dollar/Euro Futures Less Sensitive to U.S. News Post-2008
nomic news for the more forward-looking central bank
communication at the ZLB, Measuring the Effect of the
Housing: Existing-home sales Zero Lower Bound on Medium- and Longer-Term Inter-
Housing: Housing permits Pre-2009
est Rates, by Eric T. Swanson and John C. Williams,
Housing: Housing starts Post-2008
Housing: New-home sales American Economic Review, vol. 104, no. 10, 2014, pp.
Initial jobless claims 3,15485, estimated the time-varying sensitivity of do-
Nonfarm payrolls
mestic yields along the yield curve to establish the extent
Real GDP growth: Advance
Real GDP growth: Second to which policy was effectively constrained by the ZLB.
Real GDP growth: Final 2
A taxonomy accounting for heterogeneity in macroeco-
Inflation: Consumer Price Index nomic news effects on asset prices can be found in Is
Inflation: Producer price index
Personal income the Intrinsic Value of Macroeconomic News Announce-
Personal spending ments Related to Their Asset Price Impact? by Thomas
Retail sales Gilbert, Chiara Scotti, George Strasser and Clara Vega,
Consumer confidence
European Central Bank, Working Paper no. 1882, Febru-
Consumer sentiment: Preliminary
Consumer sentiment: Final ary 2016.
Industrial production 3
Previous research has shown that these survey-based
Durable goods orders
market expectations are similar to forecasts derived
Factory orders
ISM manufacturing index from financial instruments built on the underlying
macroeconomic news releases. See Macroeconomic
30 25 20 15 10 5 0 5 10 15 20 Derivatives: An Initial Analysis of Market-Based Macro
Magnitude of response (basis points)
Forecasts, Uncertainty, and Risk, by Refet Grkaynak
NOTES: Horizontal bars display the responses of U.S. dollar/euro futures prices to normalized macroeconomic surprises, and Justin Wolfers, in NBER International Seminar on
with the black spikes indicating a one-standard-error confidence band for each estimated response before (blue) and
during (orange) the zero lower bound (ZLB). During the ZLB, responses are more muted, reflecting lower sensitivity to Macroeconomics 2005, Jeffrey Frankel and Christopher
U.S. news. ISM is the Institute for Supply Management.
Pissarides ed., pp. 1150.
SOURCE: Authors calculations. 4
Positive surprises describe higher than expected
values. This is opposite for weekly initial claims for
informational content embedded in the recession and inhibited the recovery. unemployment. The interpretation of inflation surprises
macroeconomic data releases. This They also show stronger responses to is more ambiguous because higher-than-expected infla-
analysis provides a snapshot of what the weekly initial jobless claims and to CPI tion could be considered good or bad depending on the
markets believe to be the current state inflation readings, consistent with the inflations level relative to the target.
of the economy and where it is heading Fed policy mandate and policymakers 5
Key Secular Trends and Implications for Monetary
relative to other economies. Changes in continuing commitment to attain mon- Policy, speech by Robert S. Kaplan, Federal Reserve
those responses hint at where markets etary policy objectives. Bank of Dallas, Aug. 2, 2016, www.dallasfed.org/news/
and policymakers perceive risks to the speeches/kaplan/2016/rsk160802.aspx.
current economic outlook. Koch is a senior research economist and 6
These results are in line with the literature that has
Asset prices responses suggest a Yung is a research economist in the Re- previously found that the link between macroeconomic
greater focus on the housing market in search Department at the Federal Reserve news and bond markets is simpler and stronger than with
line with the vulnerabilities that led to Bank of Dallas. foreign exchange markets.

DALLASFED Economic Letter


is published by the Federal Reserve Bank of Dallas.
Mine Ycel, Senior Vice President and Director of Research
Jim Dolmas, Executive Editor
The views expressed are those of the authors and Michael Weiss, Editor
should not be attributed to the Federal Reserve Bank Kathy Thacker, Associate Editor
of Dallas or the Federal Reserve System.
Ellah Pia, Graphic Designer
Articles may be reprinted on the condition that
the source is credited to the Federal Reserve Bank
of Dallas.
Economic Letter is available on the Dallas Fed
website, www.dallasfed.org. Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201

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