Macro economy-mini course

Macro factors are essential to analyze to get a bigger picture from macroeconomic data. I mainly apply my macro of 10 major economies.

1) Major stock indices (adjusted by inflation), money supply – mainly calculated for the US – SP500 adjusted for CPI, PCE, M1 and M2 – tells us if the market index is “inflated” or bubbled up by increased money supply or increasing prices. All these features are daily percentage changes, to make them stationary. 

2) Principal components of continuous maturity bond data

Pricing factors can be extracted as the principal components of the cross-section of treasury yields i.e. These factors are linear combinations of the treasury yields. The first three PCs have been prime candidates in this regard as they generally explain over 99% of the variability in the term structure of bond yields and, due to their loadings, may be interpreted as the level, slope and curvature factor. More can be explored in the paper, Equity tail risk in the treasury bond market.

3) Common sovereign ratios (calculated month-on-month and year-on-year)-

  1. Sovereign Debt normalised with GDP
  2. Foreign Exchange normalised with GDP, 
  3. Government spending normalised to GDP 
  4. Current account balance to normalised GDP
  5. Government Budget balance normalised by GDP
  6. Labour force as a percentage of population

4) Fixed income term premium – the risk or the term premium is the premium or compensation the bond holder gets to account for the possibility of short-term interest rates deviating from the expected path. This is sourced from the FRED. The methodology for the term structure model used to calculate term premia is covered in the paper, Three-Factor Nominal Term Structure Model. All the term premia features are daily percentage changes, to make them stationary. 

5) Features that are calculated as month-on-month and year-on-year percentage changes: 

  1. Current Account Balance – the percentage change in a country’s international transactions with other countries. 
  2. Exports – the percentage change in a country’s exports to other countries.
  3. Industrial production – the percentage change in a country’s output by industrial sector. 
  4. Imports – the percentage change in a country’s imports from other countries. 
  5. Money supply – the percentage change in a country’s M2 money supply. 
  6. Retail Sales Index- the percentage change in a country’s demand for durable and non-durable goods. 
  7. Employment – the percentage change in a country’s employment numbers. 
  8. Housing Starts – the percentage change in a country’s new residential construction projects. 
  9. Trade balance – the percentage change in a country’s net sum of imports and exports. 
  10. Unemployment rate – the percentage change in a country’s percentage of labor that is jobless.
  11. Labour force – the percentage change in a country’s active labor force. 
  12. Foreign Exchange Reserves – the percentage change in a country’s forex reserves. 
  13. Consumer Price Index – the percentage change in a country’s CPI inflation measure.
  14. Wholesale Price Index – the percentage change in a country’s WPI inflation measure. 

6) Features that are calculated as quarter-on-quarter change:

  1. Government Spending – the percentage change in a country’s government spending.
  2. Fixed Investment – the percentage change in a country’s assets.
  3. Personal Consumption Expenditure – the percentage change in a country’s household expenditures.
  4. Government debt – the percentage change in a country’s government debt.
  5. Gross Domestic product – the percentage change in a country’s gross domestic product.
  6. Read Gross domestic product – GDP adjusted for inflation.
  7. GDP Price deflator – the percentage change in a country’s price levels.

7) Seasonally adjusted features – calculated using additive seasonal decomposition to break the series into trend, seasonal and noise components. Only the trend is extracted to get a seasonally adjusted signal. After seasonal adjustment, we calculate the month-on-month and year-on-year change.

a) Seasonally adjusted Employment 

b) Seasonally adjusted Retail Sales Index 

c) Seasonally adjusted Housing Starts 

8) Total Credit to the non-financial sector- 

The measure of the credit given to non-financial sectors in selected developed economies. This is a leading indicator and can inform us about movement in indicators like Gross domestic product in the future. We calculate the quarter-on-quarter change for these features.

9) Treasury Interest rate spreads – various combinations of spreads between sovereign yields of various maturities. These produce the slopes of the yield curves. Read more about the difference between term spread and term premium here.

10) Retail Inventory to Sales ratio – The percentage of inventory for durable and non-durable goods is sold. This can forecast changes in gross domestic product. We calculate the month-on-month change for these features.

11) Feds Fund rate – daily percentage change in the interbank overnight rate at which excess reserves based on bank requirements are lent or borrowed. The FOMC makes its decisions about rate adjustments based on key economic indicators that may show signs of inflation, recession, or other issues that can affect sustainable economic growth.

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