Maria Vieira
We look at how economic surprises affect different equity indices and show they are not affected in the same way: employment surprise numbers are very impactful for S&P500 and DJI, but not for Nasdaq. However, inflation surprises have strong impact in all the three indices.
- How do economic surprises affect different equity indices? For this blog, we consider the highly liquid equity index futures: the Nasdaq 100 E-Mini, the Dow Jones Industrial E-Mini and compare with our previous studies on the S&P 500 E-Mini.
- There are significant distinctions in the market movements of the different equity indices due to economic surprises.
- Inflation is among the most important indicators for all the three indices, whereas employment surprises move only the S&P 500 and DJI.
Economic release data that is significantly different from the consensus can move markets. The market movement depends on the economic indicator and on the type of market (FX, equity, or fixed income), as we have shown in a previous publication, accessible here: Economic Surprises: What Really Moves the Markets. There, we studied the effect of US economic surprises on the JPY/USD exchange rate, 10-year US government bond price and on the S&P 500 E-Mini index. The question we address here is how economic surprises affect different equity indices. For this study, we choose three highly liquid equity index futures: the Nasdaq 100 E-Mini, the Dow Jones Industrial E-Mini and compare them with our previous studies on the S&P 500 E-Mini.
Firstly, we review the constituents of these equity indices:
- The Nasdaq-100, which includes 100 of the largest non-financial companies in the Nasdaq Composite, accounts for over 90% of the movement of the Nasdaq Composite. The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange (more than 2500 stocks). Its composition is heavily weighted towards companies in the information technology sector.
- First calculated in 1896, the Dow Jones Industrial Average (DJI) is the second oldest among US market indices, after the Dow Jones Transportation Average. The composition of DJI index consists of 30 prominent companies listed on stock exchanges in the United States.
- The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
As an illustration of market impact, Figure 1 shows the response of Nasdaq to the April 2021 release of US Core CPI. The consensus in the last poll before the actual was released was 0.3. On 12 May 2021 the actual was released at 8:30 am ET with a value of 0.9, which resulted in an actual surprise of 0.6. The response in the Nasdaq index was immediate, it suddenly dropped by about 150 points.
Figure 1 – Nasdaq 100 E-Mini index as a function of the time on 5/12/2021, obtained from LSEG Tick History.
Source: LSEG Tick History. Past performance is no guarantee of future results. Please see the end for important legal disclosures
To study the impact of an indicator in response to an economic surprise, we first calculated the index change in a 5-minute window around the indicator release. We then bin the actual surprises into five quintiles and measure the average percentage change in the price in each quintile of actual surprise. Higher quintile spread means high impact, and vice-versa.
In Figure 2 we plot the quintile spread of different indicators, that is, the difference of the index futures contract price change between quintile 5 (most positive surprises) minus quintile 1 (largest negative surprises). We considered the quintile difference below 0.1% as not significant. Samples contain all last poll before a first release for the period of 2009 to 2022.
We observe that for Nasdaq 100 E-Mini, inflation numbers dominate the market movements, having the highest impact among the indicators. This is in contrast with what we had found for the JPY/USD exchange rate, 10-year US government bond price and the S&P 500 E-Mini index, which had employment numbers (nonfarm payroll and private payroll) as the most important indicators. For DJI E-Mini, inflation numbers are the most important indicators, however, workweek hours and ISM Manufacturing PMI also have a high impact. Payroll has an impact that is still significant for DJI E-Mini. Finally, for the S&P 500 E-mini, as we have shown in a previous study, the market impact in that index is mostly due to payroll numbers, although inflation has a significant importance.
Figure 2(a) – Quintile spread for the Nasdaq 100 E-Mini index
Source: LSEG. Past performance is no guarantee of future results. Please see the end for important legal disclosures
Figure 2(b) – Quintile spread for the DJI E-Mini index
Source: LSEG. Past performance is no guarantee of future results. Please see the end for important legal disclosures
Figure 2(c )- Quintile spread for the S&P 500 E-Mini index.
Source: LSEG. Past performance is no guarantee of future results. Please see the end for important legal disclosures
Table 1 – The five most important indicators for each index. The number in parenthesis denotes the quintile spread value.
| Nasdaq 100 E-Mini | DJI E-Mini | S&P 500 E-Mini |
|---|---|---|
| Core CPI mm (-0.70) | CPI index (-0.40) | Private payrolls (0.45 ) |
| CPI index (-0.66) | Core CPI (-0.35) | Nonfarm payrolls (0.44) |
| Core CPI yy (-0.58) | Average workweek hrs (0.33) | ISM Manufacturing PMI (0.4) |
| CPI yy (-0.56) | Core CPI yy hrs (-0.32) | Core CPI mm (-0.34) |
| CPI mm (-0.50) | ISM Manufacturing PMI (0.31) | Retail sales mm (0.31) |
To conclude, we have shown that there are significant distinctions in the market movements of the different equity indices due to economic surprises. Whereas payroll is very important for the S&P 500 E-Mini index, as well as for FX and fixed income, it has no importance in the Nasdaq 100 E-mini movements and limited importance in the DJI E-Mini. However, inflation is among the most important indicators for all the three indices.
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