We Need to Talk About Data

Forex Market, We Need, Talk, About, Data, macro-economic, fx trader, forex

The accuracy and reliability of macro-economic data has long been a bone of contention for the markets but to some extent it was one which analysts and traders thought they could live with.

Not least because if we all share the same information, even if it’s not that accurate, the market will at least be operating on a level playing field. However, recent events have called that “best we can do” attitude into question.

Less than a month ago Japan moved back into recession according to official data, as Q3 GDP showed a contraction of -0.8%. Whilst the recession was considered to be technical rather than actual with the data potentially subject to revision, the revised figure showed growth of +1% sticks in one’s craw, so to speak. That revision is a 225% percent reversal in absolute terms. Such a big discrepancy calls into question the reliability of the data in the first place.

Question marks are now being asked about Australia’s unemployment data after a read of 71k new jobs created in November, versus expectations of -10k loss.

Where does the fault lay?

The truth is that there is probably blame on both sides. From the traders’ point of view, we have been lulled into a false sense of security by believing that just because the data is official it must be accurate. Markets were guilty of similar self-deception (ahead of the ECB’s December meeting) through their interpretation of Mario Draghi’s comments and intentions. And as we now know the markets were very much disappointed by the end result. Reinforcing the old adage that one should buy the rumour and sell the fact.

At the same time the statisticians, who compile economic data, have yet to adjust their methodology to take account of the modern world and they continue to pander to the markets thirst for single data points, rather than a more realistic range based approach.

Survey based data from which many economic releases are compiled can be unreliable at best and outright misleading at worst. If you want an example of this witness the opinion polls prior to the UK general election in May 2015, none of which showed any possibility of an outright Conservative party majority, yet that was the result that we got.

Something has got to change

Markets have been grappling with the idea of trying to generate more accurate and reliable economic data for decades. In fact insights as to how to achieve this were the principal tools and advantage of the major Global Macro Hedge Funds for many years.

Most famously demonstrated by the George Soros bet against Sterling’s continued membership of the ERM (the precursor to the Euro) and Johns Paulson’s aggressive short against all things subprime, prior to the Credit Crunch.

More accurate data, a better interpretation of what that data means and how to take advantage of it was a route map to fame and fortune for these mega traders.

But if we were in any doubt about how the world has changed in recent times, we need only look at the result of December’s ECB volte-face. It had on one of the world’s leading black box funds, Man Group’s flagship AHL fund, lose 5% of its value in a single day, as a result of misreading the ECB tea leaves.