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The impact of macroeconomic information announcements in Australia on interest rate future prices

Alex Frino and Grant Wearin

School of Business, University of Sydney

Q2 2006

 

In Australia, macroeconomic information announcements occur on approximately 45% of trading days. Consequently, they may be one of the most important contributors to price adjustment in futures markets. This paper reports the results of research which examines 27 different classes of macroeconomic announcements that are made at 11.30 am, and seeks answers to two questions.


1. What types of macroeconomic information have the largest impact on futures prices on announcement?
2. How long does it take the market to digest such information?

This information is relevant to funds that are considering implementing a global macro strategy based on Australia, and to high frequency traders who focus on trading around macroeconomic announcements.

The following are the key findings:
First, announcements of (1) employment numbers and (2) CPI systematically have the largest impact on futures prices.
Second, announcements of (3) Gross Domestic Product, (4) retail sales, (5) dwelling starts, (6) building approvals, and (7) housing finance also have a smaller, but nevertheless systematic impact on futures prices.

Finally, the largest impact on futures prices associated with macroeconomic announcements occur in the first minute after announcement, although there is price adjustment for up to 45 minutes following the announcement.

Australian macroeconomic information announcements

There are 32 different types of macroeconomic announcements identified in this study1. A list of the announcements, together with information on the issuing body and frequency (eg. quarterly or monthly) appears in Appendix 1. Most of the announcements examined are made by the Australian Bureau of Statistics, although some are made by the ANZ, Melbourne Institute, National Australia Bank and Westpac.

In this study we examine announcements that occurred over the period January 1 2002 to December 31 2004. The bulk of announcements occur at 11.30 am, and we therefore focus on these in this study. There were 472 such announcements made over 762 trading days over the sample period examined in this study. Table 1 below describes the announcements examined by day of the week. A little over one-quarter of the announcements occurs on Thursdays. Wednesday is also a ‘busy’ day of the week in terms of announcements, with Wednesday and Thursday together accounting for almost half the announcements.

Figure 1: Announcements by day of the week

 
Announcements
 
No.
Percentage
Monday
55
16%
Tuesday
64
19%
Wednesday
75
22%
Thursday
92
27%
Friday
59
17%
 
 
 
TOTAL
345
100%

  

Which announcements cause price adjustment?

The three most actively traded interest rate futures in Australia are Bank Accepted Bills, 3 Year Bond and 10 Year Bond Futures. In this paper, we report the results of analysis of 10 Year Bond Futures prices, although results are similar across all interest rate products2.

Figure 2 below reports the price volatility in the minute after each of the macroeconomic announcements, together with a statistic (t-statistic) which indicates how significant the relationship is in a statistical sense. The methodology used to produce the results in Figure 2 is described in Appendix 2.

There are seven macroeconomic announcements that have a clear and significant impact on futures prices. The two most important both in terms of their impact on futures prices and the statistical significance of their impact are (1) employment numbers3 and (2) the Consumer Price Index. They are associated with a price change of between 2 and 2.5 basis points in the minute in which the announcements are made.

The next most important announcements are (3) Gross Domestic Product and (4) retail sales, although their impact on price volatility is approximately half that of employment and inflation numbers (approximately 1 to 1.5 basis points in the minute immediately following announcements). Other announcements that are less important in terms of the magnitude of the price adjustment they propagate, but which nevertheless have a significant impact on the prices are (5) dwelling starts, (6) building approvals, and (7) housing finance.

Figure 2: Price adjustment and statistical significance of adjustment in the minute following macroeconomic announcements (ranked by size of adjustment)*
Impact of Macroeconomic Information - Figure 2 

Speed of adjustment to announcements

Figure 2 below reports the price volatility and trading volume for 10 Year Bond futures, in one minute intervals, on days of 11.30 am macroeconomic information announcements. Price volatility is defined as the absolute value of the price change across days for a specific time interval (see Appendix 2). For comparison, days on which there are no announcements are also plotted. While the previous section identified which announcements result in price adjustment, this section provides an indication of the amount of time taken to adjust to macroeconomic announcements. This provides insights into how long opportunities for profit associated with macroeconomic information announcements last.

Panel A of Figure 2 illustrates the intraday pattern in volatility on days of macroeconomic announcements in comparison to other days. The largest price movement occurs in the minute of macroeconomic announcements, and the average size of this movement is almost as large as that occurring at the open of trading. There is also evidence of abnormal price movement (relative to other days) for up to 45 minutes following announcements. This suggests that there are opportunities for profiting from price movements associated with macroeconomic announcements for 45 minutes following such releases.

Panel B of Figure 2 illustrates the intraday pattern in trading volume on days of macroeconomic announcements in comparison to other days. The patterns in trading volume on announcement days are virtually identical to those of price volatility. Hence, the spikes in price volatility are accompanied by elevations in trading volume.

Figure 3: Price Volatility and Trading Volume for 10 Year Bond Futures around Macroeconomic Information Announcements
Impact of Macroeconomic Information - Figure 3 

Appendix 1: Australian Macroeconomic Announcements

 
Announcement
Frequency
Source
Panel A: 11.30am Announcements
 
 
1
ANZ Job Advertisements
Monthly
ANZ
2
Australia House Price
Quarterly
ABS
3
Average Weekly Wages
Quarterly
ABS
4
Building Approvals
Monthly
ABS
5
Company Operating Profit
Quarterly
ABS
6
Consumer Price Index
Quarterly
ABS
7
Current Account Deficit
Quarterly
ABS
8
Dwelling Starts
Quarterly
ABS
9
Employment Change
Monthly
ABS
10
Export price index
Quarterly
ABS
11
Gross Domestic Product
Quarterly
ABS
12
Housing Finance
Monthly
ABS
13
Import Price Index
Quarterly
ABS
14
International Trade on Goods & Services
Monthly
ABS
15
Inventories
Quarterly
ABS
16
Job vacancies
Quarterly
ABS
17
National Australia Bank Business Survey
Monthly & Quarterly
NAB
18
New Motor Vehicle Sales MoM
Monthly
ABS
19
Participation Rate
Monthly
ABS
20
Private Capital Expenditure
Quarterly
ABS
21
Producer Price Index
Quarterly
ABS
22
Retail Sales
Monthly
ABS
23
Trade Balance
Monthly
ABS
24
Unemployment Rate
Monthly
ABS
25
Wage Cost Index
Quarterly
ABS
26
Westpac Melbourne Institute Leading Economic Index
Monthly
Westpac / Melbourne Institute
27
Westpac Consumer Confidence
Monthly
Westpac / Melbourne Institute
 
 
 
 
Panel B: 10.00am Announcements
 
 
28
TD Securities-Melbourne Institute Inflation Index
 
TD Securities / Melbourne Institute
 
 
 
 
Panel C: 11.00am Announcements
 
 
29
 
Melbourne Institute Consumer Sentiment and Inflation Expectations
 
Melbourne Institute
 
 
 
 
Panel D: 9.30am Announcements
 
 
30
RBA Cash Rate Target
Monthly
RBA
31
AIG Performance of Manufacturing Index
 
Australian Industry Group
32
AIG Performance of Services Index
 
Australian Industry Group


Appendix 2: Method used to examine the sensitivity of futures prices to different macroeconomic announcements
 

Data is sourced from Reuters and covers the period January 1 2002 to December 31 2004 for 10 Year Bond futures contracts. The data consists of minute by minute snapshots of the market on the SFE’s trading platform (SYCOM) for the nearest-to-deliver futures contract at the end of each minute across the trading day. These snapshots capture the last traded price, bid and ask prices and volumes at the best quotes, traded volume and the number of trades across each minute.

The sample is filtered as follows: Any day on which an announcement occurs at a time other than 11.30am is deleted from the sample5. The sample is then divided into 11.30am announcement days and ‘non-announcement’ days. There are 566 announcements made across a total of 762 trading days. After combining certain announcements which are released simultaneously (e.g. employment change, participation rate and unemployment releases) there are 472 announcements made over 345 days. There are 417 non-announcement days.

Volatility is defined as the absolute value of the price change from one minute to the next6. In order to identify which macroeconomic announcements have a significant impact on market volatility a dummy variable approach is used. A dummy variable regression equation is estimated as follows:
Impact of Macroeconomic Information - Equation 1
where Volatilityt is volatility in the first minute following macroeconomic announcements and Dk,t = 1 if announcement of type k made on day t, otherwise it is 0.

The coefficient βk,t is positive and significant if announcement type k has a significant impact on volatility7. A 0.05 level (95% confidence interval) is used to determine which coefficients are statistically significant.
 

 

Notes:

1 - The macroeconomic information announcements examined in this paper were identified using the Bloomberg Macroeconomic Announcement tool.

2 - For an analysis of the impact of macroeconomic information releases on other interest rate products see Frino, A. and A. Hill (2001), “Intraday futures market behaviour around major scheduled macroeconomic announcements: Australian evidence”, Journal of Banking and Finance and Frino, A. and G. Wearin, (2006), “Macroeconomic information announcements in Australia: Opportunities for Global Macros and High Frequency Traders?”, Market Insights, Edition 8.

3 - Employment numbers include Employment Change, Participation Rate and Unemployment Rate announcements which are separate announcements which are released simultaneously. Similarly, Inventories and Company Operating Profit announcements are made simultaneously, as are Export Price Index and Import Price Index announcements.

4 - Unemployment and Westpac Indices previously released at 10.30am.

5 - These announcements include the RBA cash rate decision at 9.30am, The Melbourne Institute Consumer Sentiment and Inflationary Expectations announcements and TD Securities-Melbourne Institute Inflation Index.

6 - Volatility = |Pricet - Pricet-1|

7 - We also examine the range as a metric of volatility and the results are similar. Ranget = Hight – Lowt

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