Economic news influences asset prices in the stock, bond, and foreign exchange markets. In general, if the news is more positive than expected, then it is likely to prompt a rise in bond yields and the exchange rate; and vice versa. This is consistent with the view that higher growth or lower inflation is good for bondholders and other investors, while higher growth or faster inflation is bad for them.
But the impact of economic news is not always as clear cut as that. A number of factors affect the reaction to news, including survey-based measures of forecasts made prior to the release and measurement errors in measuring data. In particular, survey-based measures can lead to biased estimates of the effects of true news on asset prices.
To get around these problems, we use a novel approach to measure the response to economic news. We regress the change in an asset price or yield against the surprise contained in a statistically significant announcement (in this case the nonfarm payroll numbers), using the changes in the index of forecast errors reported by the National Bureau of Economic Research (NBER) as the regression covariates. The heavy central line in each box plot shows the estimate of the response, with the whiskers showing a two standard error confidence interval. The responses are measured over two intraday intervals-from immediately before the news to thirty minutes after its release, and from before the announcement to 4 p.m.
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