You will be able to judge whether a piece of economic news is a surprise or was already expected and priced in.
The night the Fed announced a rate cut, Marcus read the news and decided to call the bank in the morning to ask for a cheaper fixed rate. The banker was polite. Fixed rates, she explained, had already come down over the previous month, when markets started expecting the cut. The offer she could give him today was about the same as last week's. Marcus had treated the announcement as news. For the market, it had stopped being news weeks earlier.
This lesson is about that gap: the difference between what happened and what people already expected to happen. Once you see it, a lot of market reactions that seem strange start to make sense, and a lot of rushed decisions stop looking urgent.
Prices in financial markets, including T-bill yields, bond yields and the rates banks use to price fixed rate loans, are set by people trading on what they expect. If everyone expects the Fed to cut rates next month, they act on that belief now. Short-term yields fall, banks lower their fixed rate offers, and new T-bill auctions clear at lower yields. By the day of the decision, much of the effect is already in the price.
So when the decision arrives exactly as expected, markets often barely move. What moves them is the surprise: the gap between the actual result and what was expected beforehand.
Here is an example with made-up figures. Markets fully expect the Fed to cut its range by a quarter of a percentage point. If it does, local T-bill yields and fixed rate offers hardly change on the day, because they moved weeks earlier. If the Fed surprises everyone and holds rates steady, short-term yields jump the next morning, because the expected cut has to be taken back out of prices. A decision to do nothing can move markets more than a cut.
The same works for economic data. An inflation figure of 3% is good news for markets if they expected 3.5%, and bad news if they expected 2.5%.
Expectations are published, if you know where to look. Before each Fed meeting, financial news reports what markets are pricing in, often as the probability of a cut, a hold or a rise. Before major data releases, such as inflation or GDP, news services publish the consensus forecast from surveys of economists.
Compare the actual result with that figure. A big gap is real news. A small one is mostly confirmation.
You can also see it in local rates. In lesson 2.3, Deposits, fixed deposits and T-bills move with rates, at different speeds, you saw that T-bill yields react almost at once to rate expectations, while fixed deposit promotions follow with a lag. If T-bill yields and fixed mortgage offers fell in the weeks before a Fed cut, the cut was expected and largely priced in. Three-month compounded SORA, as lesson 2.2 explained, looks back over past rates, so it will keep adjusting for months afterwards whether or not the move was a surprise.
Headlines are full of forecasts: where rates will be next year, when the recession will start, how far the currency will fall. They are often reported with the same confidence as facts.
When you read one, note two things. Who made it? A central bank's own projection, a bank's research team, a survey of economists and a commentator on social media are very different sources. And how often have their past forecasts been right? Forecasts of turning points, as lesson 4.1, The business cycle: expansion, peak, contraction and recovery, explained, have a poor record. A confident forecast from a source with no track record you can check deserves very little weight.
None of this means forecasts are useless. They tell you what people expect, which is what prices already reflect. What they do not tell you is what will happen.
A practical rule follows from all this. If you are hearing about something because it is on every front page, financial prices have almost certainly already adjusted to it. The rate cut everyone is talking about is in the fixed rate offers. The recession everyone fears is largely reflected in share prices. Acting on it now means trading at prices that already include it.
This is why reacting to the news is usually a poor strategy for a household. You are almost always late, and you are acting on the part of the story that is no longer news. The things that should drive your decisions are your own circumstances, such as a loan's lock-in period ending, which lesson 7.3, Rules that stop you acting on the news, builds on.
Marcus did not lose anything by calling the bank. But he would have saved himself the worry by checking what had happened to fixed rate offers in the month before the decision. Pick a recent rate decision, from the Fed or a MAS statement, and look at what was expected before it came out.
For one recent rate decision, compare the decision with what was expected beforehand and note how local rates moved.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).