Investors Are Placing Heavier Bets Prior to Economic Data

Mon Mar 04 2024
Eric Whitman (323 articles)
Investors Are Placing Heavier Bets Prior to Economic Data

Traders in bonds are showing their trust in their ability to predict how new data will impact markets by placing bets hours before important U.S. economic reports.

Thanks to the pandemic’s setbacks and the Fed’s quickest interest rate hike campaign in decades, most people now have a good idea of where the economy and the central bank are heading. Most investors are still expecting the Federal Reserve to start cutting interest rates later this year, so the data mainly changes their timeline assumptions.

An analysis of trading since the start of 2022 prepared for The Wall Street Journal by Alexander Kurov, a professor of finance at West Virginia University, shows that heavily traded futures markets linked to U.S. Treasurys are experiencing sharp moves in the days leading up to significant reports on employment, inflation, and economic growth.

According to Kurov’s research, seven important economic releases cause bond futures to fluctuate by an average of 0.14 percentage points. Starting as early as six hours before the planned announcement, about half of that transition has already taken place before the data is released. This is different from previous years, when much of the preparatory work was done in the half an hour prior to the data.

The price drift begins at a considerably earlier point than what we discovered in our earlier studies, Kurov stated. “If traders begin betting five minutes prior to an announcement, it’s essentially too late,” the trader said.

The market is already unstable, and aggressive positioning could make it even worse. From the beginning of the Fed’s tightening policy about two years ago, bond prices have fluctuated wildly. A benchmark for lending rates, the 10-year Treasury yield rises when bond prices fall and has quite significant daily movements for nearly two years.

Nearly no one suspects infidelity. Prior research by Kurov and others had indicated that data leaks might be the cause of early trading; however, in 2020, the Labor Department ceased informing the media with early results. The United Kingdom’s early-distribution policies were revised a number of years ago in response to suspicious activity. Additionally, the opening of European markets is frequently when futures begin to move.

Instead, experts said the moves demonstrate traders’ increasing confidence in their ability to predict market directions based on both the data and their own guesses.

New York-based hedge fund portfolio manager Lundy Wright of Weiss Multi-Strategy Advisers noted that trying to predict a shift is still not an easy undertaking. Releases are not clear, and they often occur at the same time or near other market-moving events. Traders still need to think about how the data fits with their bigger picture of the economy, even if they have a good idea of what it will show.

Also, investors may be caught off guard by unexpected data and have to react quickly, which might lead to sharper-than-expected changes in the market if trading starts too early.

In the hours leading up to Thursday’s announcement of the favored inflation barometer of the Federal Reserve, the personal consumption expenditures price index, bond rates rose. Like the consumer and producer price indices earlier in the month, traders were hoping for a strong release of the data. Immediate after the release, yields dropped, even though the results were in agreement with the predictions of the forecasters.

However, modern investors have access to cutting-edge tools like artificial intelligence, which allow them to do complex analyses in advance. An early bet is more enticing due to the widespread availability of such information. The market can have changed direction by the time you wait.

“We keep an eye on who’s currently hot—which forecasters have shown the most reliability over the last three to six months,” Wright explained. “It’s similar to placing a wager with a seasoned bettor.”

A document seen by The Wall Street Journal states that Weiss, a hedge fund that managed $4.2 billion in client assets at year’s end, informed investors on Friday that it is winding down.

Kurov identified twelve of the thirty most important economic indicators that have a substantial impact on the Treasury market. Traders have shown accurate predictions for seven of these indicators. According to Kurov, one area that has been successful is the unemployment claims, where advanced trading accounts for over a third of the total change. The market was able to recover following the PCE data thanks in part to Thursday’s report, which was worse than anticipated.

The most important figures on inflation and jobs, the consumer price index and nonfarm payrolls, are notoriously difficult for traders to speculate on in the days leading up to their announcements. Bond yields are still significantly affected by those, although the advanced moves aren’t usually predictive.

The two reports offer investors the clearest picture of the future of interest rates, a key factor in bond prices. Additionally, they have the potential to make a lot of noise. According to analysts, that raises the possibility of placing large bets in advance, which could make traders more patient.

The rate curve is perhaps more complex than it seems, according to several experts. Many of the economic forecasts made by Wall Street in the pre-pandemic era have been proven wrong. Overconfident traders may be in for some unpleasant surprises.

The Fed has relied on data on multiple occasions, but the data has never been so complicated and unpredictable, according to Prudential’s global head of derivatives trading, Chris McAlister.

Eric Whitman

Eric Whitman

Eric Whitman is our Senior Correspondent who has been reporting on Stock Market for last 5+ years. He handles news for UK and Europe. He is based in London