Notesale: Turn your study into money

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Introduction
1981 started
174 countries
WEI : world equity indices
GP : graph price function
Autocomplete or menus or learn by heard is the best way to use functions in Bloomberg
MAIN: brings you to home of the directory
You can also just enter the function in the command line

Economic Indicators

The Primacy of GDP –
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GDP: Gross Domestic Product
Backdrop for the financial markets
50 years: growth of 8% annual for GDP
WGDPWRLD on Bloomberg will put up index for you
US: World’s largest economy since 1872 over the UK
Main unit of economic statistics is the unit state
Spectacular policy failures in part let to Great Depression
1987: Italy decided to include blackmarket in its GDP cal
Nigeria in 2014: 89% upper revision in GDP after capturing new industries
Personal consumption – 2/3 of US GDP
When a security has exposure to a certain country, you want to use indicators from that country to
analyze it
ECOW: economic data watch function – most important data by country
Few dozen core economic indicators
5 most important: economic growth, inflation, unemployment, business confidence, housing

Economic Growth:
 Measured by GDP – the market value of all final goods and services produced in a country
 Broadest measure of economic activity
 GDP = C + I + G + (X-M)
 C= personal consumption, I= private investment, G= government consumption, X = exports, M =
imports, (X-M) = net exports
 Look at percentage change in GDP from one year to the next
 US average growth of 6
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Recession: 2 successive quarters of negative real GDP growth
Economy is cyclical

Inflation:
 Economic indicator which unveils real growth of economy
 Fixed income investors follow closely as inflation erodes the value of bonds
 General increase in prices of goods and services which diminishes the purchasing power of money
 Increases cost of living
 Quarterly GDP report (price deflator) and CPI (monthly consumer price index)
 CPI must be truly representative of spending habits in that country
 Inflation baskets: weights represent sectors in the economy
Unemployment:
 Consumer spending driven by consumer income
 Increase in unemployment decreases GDP growth
 GDP CYOY Index: GDP year over year growth
 Strong relationship between GDP and unemployment
 When the economy shrinks, employment declines
Business Confidence:
 Individual business leaders make large investments and hire people when they are confident there will
be additional demand for their goods and services in the future
 ISM: institute for supply management; largest followed index for US manufacturing activity; PMI –
the purchasing manager index ; survey people in charge of buying goods and services for corporations
about business conditions ; above 50 signifies optimism and below 50 pessimism
 PMI is a good leading indicator of GDP growth
 Strong relationship between PMI and GDP ; PMI dips shortly before GDP declines
Housing:
 Main indicator for residential housing construction is housing starts
 Before home builders build houses they must be confident consumers are able to pay a 30 yr
mortgage
 Also, when they buy house, they buy other goods ie paint supplies furniture etc, contributing to GDP
in other sectors
 Relationship between housing starts and GDP
***Best leading indicator: PMI
Real GDP growth is cyclical and the main gauge of economic health

Monitoring GDP:
 Real GDP Growth is best overall indicator of economic growth
 Indirectly keep tabs on economic through indicators mentioned above
 WECO : World Economic Calendar
 PMI published early ; surv(M) = prelim estimate, if actual is greater than estimate it is a positive
surprise ; monthly
 Change in non-farm payrolls is also monthly

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Bloomberg trade patterns chart – imports are the outward facing bar around the ring and exports are
the inward facing ones
Currency market operates 24h a week; only gap is on weekends
3 main entities which trade currencies: financial investors buying and selling securities in foreign
currencies (largest bucket of users, “HOT MONEY”), second is corporations conducting global
business, and third is travelers exchanging currency for personal use
Pegged Currencies: currencies that are linked or pegged to other countries’ currency values
What drives currency values? SUPPLY AND DEMAND
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Gold is viewed as an inflation hedge

Fixed Income:
 Aka Bond Market
 Plays crucial role of borrowing and selling to government business and consumers
 Biggest and most complex market in the world
 Fixed income = borrowing and lending
 Bond market born out of interest rate liberalization
 Sovereign debt market = government bond market; government spending has risen steeply
 BUDGN: orange line represents outlays and white lines tax receipts; orange above white: government
deficit
Foreign Owners of Government Debt –
 One reason why foreign countries buy US government bonds is the currency market; many countries
are forced to accumulate FX reserves, others sell their currency and buy US government bonds in
order to weaken their currency
 US bonds are viewed as safest financial asset on earth
 Growth of US debt market explained by rising deficit and foreigners looking for somewhere to park
their FX reserves
 Investors also use them as a safe haven
 When volatility increases, investors buy bonds for safety
 US bonds backed by taxpayers
Corporate Bonds –
 Debt repayments lower taxes and that is a reason why companies issue corp bonds

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Credit Risk Indicators Credit Ratings: rate government and corporate debt
 Green rating represents recent upgrade, red rating a downgrade
 At least BBB- rating or above are investment grade – below that non-investment grade
 CDS: Credit Default Swaps
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Federal fund futures suggest what the market expects the FOMC to do next; allows us to determine
the probability of future FOMC decision
Red line = percent chance of a rate cut
White line = percent chance of no change
Blue line = percent chance of a rate hike

The Yield Curve –
 Visual representation of the cost of borrowing
 Usually, LT rates are higher as there is more uncertainty (solvency, inflation) in the LT
 Term premium: extra yield demanded for holding LT bond
 Corporate projects are usually funded with medium-term borrowing
 Corporate bonds usually more expensive than government bonds (spread)
 Cost of borrowing for companies will change when interest rates change
 Corporate spread narrows = outperforming, widens = underperforming
 Overnight interest rate = yield on a 24 hour bond
 Long-term yield drivers include interest rate forecasts, LT GDP growth estimates, demographics,
demand for LT borrowing, supply of LT lending, inflation expectations (most powerful)
 Bond traders sell bonds in anticipation of inflation rises and rate hikes, and buy in anticipation of falls
in inflation and rate cuts
 If rates are low and inflation goes up, yield curve will steepen
 When investors anticipate a boom, inflation expectations rise and begin to expect rises in short-term
interest rates
 Inverted yield curve = negative term premium

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