How to read macro data to decipher market movements

Close to 100 macro data points get released every month. They vary in frequency of release and the period of data capture. For example, inflation data released in March will show the actual inflation of February, but the Index of Industrial Production (IIP) data released on the very same date show the actual data for January. The data feels overbearing and is either ignored or overemphasised. It almost always sparks a question: will it change the markets tomorrow? Before we answer the question, here’s how we read and understand the data.

For a second, let’s go back to the basics: GDP=C+G+I+X, where C is private consumption (remember the restaurant you dined in last weekend? Yes, that counts); G is government expenditure (literally everything state and central governments spend on, from salaries to chai); I is investments (of both private and public sectors, such as the house you’re building or the road the government is laying in front of your house); and X is net exports (the branded Scotch you imported minus bedsheets your neighbourhood textile dealer exported).

This framework is the most amateur and the most experienced way to understand the economy. Just bucket those 100+ indicators into these 4 categories and then think deep.

Despite looking at quantitative data, your insights can be very qualitative. The same data can speak different things to you and me, and that’s okay. No doubt economists are cynical. For example, credit growth might excite a person but another person can dismiss the trend saying, “oh well, it is only driven by medium and small industries, which have disproportionate benefits at this juncture”; or someone could fret about high inflation but another person could let it pass as more than 70 per cent of it reflects an uptick in, say, commodity prices.

In sum, it is okay to interpret the same data differently. That is what makes us human.

However, as a general rule of thumb, one must think upon growth in this month versus growth in the past 12 months; obnoxious base effects and any known one-offs. Now let’s start bucketing the indicators:

Private consumption/demand: Private consumption currently constitutes 60 per cent of our GDP. Any indicator that throws light on consumption and demand will fall under this category. So let’s start with the likes of consumer sentiment (how consumers perceive sentiment in the economy and what their optimism/pessimism levels are); personal loans (how much credit these consumers are taking) and automobile sales (two-wheelers and passenger vehicles — the high-ticket items of discretionary consumption). Other demand indicators such as non-Pol (petroleum, oils and lubricants) imports, which show how domestic demand is panning out; retail inflation (although it can either be a supply or demand driven), and total retail payments made in the economy further help to understand the consumption situation of the economy.

Investments: Investments constitute around 30 per cent to our GDP. Several indicators like OBICUS (capacity utilisation survey by the Reserve

: usually when capacity utilisation is above 70%, investments start); credit to industry (apart from working capital leverage, most leverage goes to creation of assets), production of steel/cement/coal etc throws light on industry’s needs to go for purchasing of assets or investments. Household investments such as real estate and capital expenditure by the government also fall under this category.

Government Consumption: This category adds 12% to the output of the country. It is probably also the most talked about component. We measure it monthly by seeing government sources of revenue such as GST, e-way bills (which are a lead indicator for GST), monthly tax collections and monthly expenditure numbers. These numbers give an early cue to the fiscal path and the chances of any fiscal surprise. Usually, it makes sense to compare the per cent of expenditure done this year with the per cent of expenditure done last year for each of these line items. A holistic picture of government finances is a must for understanding the economy and also the bond market’s dynamics.

Net Exports: On a monthly basis, the trade deficit and many insights from it — including oil deficit, exports/imports of major commodities — help to understand the picture from an external perspective. It also helps to measure quantifiably the effect of many narratives. For example, slowing of global growth will intuitively have a negative impact on exports (is it having or is India gaining market share from elsewhere?). Similarly, one can measure the impact of export promotion schemes by looking at foreign trade numbers.

Finally, we look at flows to the Indian economy (or rather markets) such as foreign institutional investments in debt and equity, foreign direct investments, external commercial borrowings and more to understand the overall complexion of the balance of payments. This somewhat completes our list of what matters to the economy.

To the million dollar investor question will the markets move with it, the short answer is no: markets function on expectations and not data releases. Understanding the data helps to better build expectations, which in turn sharpens investing skills. After all, a perspective on history is a must to understand the future.

(The author, Ankita Pathak, handles Products & Macro at DSP MF. Views are her own)