Guide
You run a trading desk with $10,000, a stock fund and a bond fund. Over 20 release days, about 5 months of the real economic calendar, the data comes out against the consensus forecast. Markets move on the surprise, not the number. Your Research Department tells you the day before what it expects. Trade the surprise, read the business cycle, and finish ahead of the market.
A release day
Each turn is a day when economic data comes out. Days with no releases are skipped, so the game jumps from one release day to the next. You start the day before the first release, in cash.
- Today
- The day's releases, each with its consensus, your forecast, the actual number, the surprise and what it did to stocks. Below them, how far the day's news moved the 10-year yield, bonds and stocks, and how far the markets drifted in the trading days since the last release day.
- Next release day
- What comes out next: the consensus and your Research Department's forecast. This is where your edge is.
- Markets and trading desk
- Both funds' prices over the session, the 10-year yield, what you hold, and the buy and sell buttons.
- End day
- In the bar at the bottom. It moves the markets to the next release day's close. The session ends after release day 20, with the debrief.
Consensus, your forecast and the surprise
Consensus is what economists expected, and it's already in the price. The surprise is the actual number minus consensus, measured in standard deviations (SD): 1.0 SD is a typical miss for that release. Payrolls, for example, typically miss by about 80,000 jobs.
Your forecast comes from your Research Department. It's better than consensus but not perfect: it gets the direction of a surprise right about three times in four. A real edge is a tilt in the odds, not a certainty.
What moves the markets
Each surprise moves the 10-year Treasury yield and stocks. The bond fund follows the yield: its duration is 5.8, so each 1 basis point (bp) rise in the yield takes about 0.058% off its price. At level 1 the Fed isn't worried about inflation, so stronger data is good for stocks (better earnings ahead) and bad for bonds (higher yields).
| Release | 10-yr yield | Bonds | Stocks |
|---|---|---|---|
| Nonfarm Payrolls | +4.8 bp | −0.28% | +0.42% |
| ISM Manufacturing PMI | +2.9 bp | −0.17% | +0.25% |
| Retail Sales | +2.1 bp | −0.12% | +0.06% |
| GDP (advance) | +1.8 bp | −0.10% | +0.39% |
| Initial Jobless Claims (higher is weaker) | −1.5 bp | +0.09% | −0.02% |
| Consumer Price Index | +0.8 bp | −0.05% | −0.02% |
| Minor releases (Construction Spending, Business Inventories, and Leading Economic Index) | about 0 | ||
These sizes come from published studies of how markets react to announcements: yields from Gilbert, Scotti, Strasser and Vega (Federal Reserve, 2015), and stocks from Andersen, Bollerslev, Diebold and Vega (2007), measured in a period when the Fed wasn't worried about inflation. Payrolls moves markets most, and inflation data barely moves them while inflation is calm. Several releases on one day add up.
The business cycle
Behind the data, the economy is in a slowdown or a recovery, and at some point in the middle of the session it turns. You aren't told which, or when. In a recovery, stocks drift up and the 10-year yield rises; in a slowdown, stocks drift down and the yield falls as the Fed eases, which lifts bonds.
Consensus looks backward: economists extrapolate the last few releases. So after the economy turns, the data keeps surprising them the same way for a while. A run of growth numbers above consensus says a recovery is under way, and a run below says a slowdown. A news headline may come first: news can move markets before any data shows it.
Trading
- Trades fill at the day's closing price, after the day's releases. Enter a dollar amount and choose Buy or Sell, or use Buy all and Sell all.
- Every trade pays 0.1% commission, so switching all your money from one fund to the other costs about 0.2%. Trade when your forecast or the cycle gives you a reason.
- Level 1 is long only: you can't sell more than you hold or borrow to buy.
The debrief
After the last release day, the debrief compares your result with holding stocks, holding bonds, and a trader with perfect hindsight. It splits your profit into release-day calls and positioning between releases, reveals the cycle and when it turned, and explains the biggest moves. Replay the same seed to try again on the same market.
The economics: IS-LM
The IS-LM relationships taught in MBA macroeconomics give every move a reason. Stronger demand (spending, jobs, orders) shifts the IS curve right: output and interest rates rise. Rising rates lower bond prices. For stocks two forces pull against each other: better earnings lift them, and higher rates lower them. When the Fed isn't worried about inflation, as at level 1, earnings win. At level 2 the Fed is worried, rates matter more, and strong data can lower stocks: "good news is bad news".