Judge whether a piece of economic news was a surprise or had already been expected and priced in.
Before the next Fed meeting or MAS statement, look up what financial news says markets are pricing in. It is usually written as a probability: the chance of a cut, a hold or a rise. Write it down before the decision comes out. You will need it when the announcement lands, because markets react to the gap between what happened and what was expected. The news on its own moves them much less.
Prices in financial markets are set by people trading on what they expect. That covers T-bill yields, bond yields and the rates banks use to price fixed rate loans. If everyone expects a Fed cut 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. When an expected event's effect is already reflected in current prices like this, people say it is priced in.
When a decision arrives exactly as expected, markets often barely move. Take a cut of a quarter of a percentage point that markets fully expected. On the day there is little left to adjust. What moves markets is the surprise, the gap between the actual result and what was expected beforehand. An unexpected hold can move markets more than an expected cut, because the cut everyone had assumed has to be taken back out of prices.
Economic data works the same way. A figure is good or bad news only relative to what was expected. An inflation figure of 3% is good news if markets expected 3.5%, and bad news if they expected 2.5%.
Marcus has a bank loan. He reads the news on the night the Fed announces a rate cut and decides to call his bank next morning to ask for a cheaper fixed rate. The banker is polite. She explains that fixed rates had already come down over the previous month, when markets started expecting the cut, and the offer available today is about the same as last week's. Marcus had treated the announcement as news, but for the market it had stopped being news weeks earlier. He lost nothing by calling. He would have saved himself the worry by checking what fixed rate offers did in the month before the decision.
Expectations are published, so you can check them yourself. 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, which comes from surveys of economists. To judge whether an event was a surprise:
Before a Fed meeting, look up what markets are pricing in: the probability of a cut, a hold or a rise. Before a data release such as inflation or GDP, look up the consensus forecast. When the result comes out, compare it with that expectation. A big gap is real news. A small gap is mostly confirmation. Check local rates. If T-bill yields and fixed mortgage offers fell in the weeks before a Fed cut, the cut was expected and largely priced in.
Lesson 2.3, "Deposits, fixed deposits and T-bills move with rates, at different speeds", showed that T-bill yields react almost at once to rate expectations, while fixed deposit promotions follow with a lag. T-bill yields are therefore the quicker local signal to check.
One rate behaves differently. Three-month compounded SORA looks back over past rates, as Lesson 2.2 explained, so it keeps adjusting for months after a rate move, whether or not the move was a surprise.
Headlines often report forecasts with the same confidence as facts: where rates will be next year, when a recession will start, how far a currency will fall. When you read one, check two things: who made it, and how often their past forecasts have been right.
Sources differ widely in reliability. A central bank's own projection, a bank's research team, a survey of economists and a commentator on social media should not get the same weight. Forecasts of turning points have a poor record, as Lesson 4.1, "The business cycle: expansion, peak, contraction and recovery", explained. A confident forecast from a source with no checkable track record deserves very little weight.
Forecasts are still useful for one thing. They show what people expect, which is what prices already reflect. They do not show what will happen.
A practical rule: if something is on every front page, financial prices have almost certainly already adjusted to it. The rate cut everyone is talking about is already in fixed rate offers. The recession everyone fears is largely reflected in share prices. Acting on front-page news means trading at prices that already include it.
For a household, reacting to the news is usually a poor strategy. You are almost always late, and you are acting on the part of the story that is no longer news. Base your decisions on your own circumstances instead, for example the lock-in period on your loan coming to an end. Lesson 7.3, "Rules that stop you acting on the news", builds on this.
Now pick a recent rate decision, from the Fed or a MAS statement, and look at what was expected before it came out. Compare that with what was announced, and decide whether the outcome was real news or confirmation.
Pick one recent rate decision. Compare it 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).