Fuel jumps 0.05 in a day. Is that news? It depends entirely on how much fuel usually moves. This week you learn to tell a signal from a wiggle.
Learning objectives. After this week you can (1) tell a level from a change; (2) size a move against that series' usual wobble; and (3) separate the part of a release you expected from the surprise.
Remember this: react to the surprise, not the level. A number you already expected is not news.
1) Your data release
Real economies run on scheduled releases: jobs reports, CPI prints, confidence surveys. Yours arrives with every Daily Report: the Macro environment line prints confidence, unemployment, fuel, inflation and the competitor's ticket. (Sections connected to a shared economy also get an Extrapoli Daily panel in the arena with headlines and more indices.) The level is today's reading; the change is today minus yesterday.
Percent Change = (Today − Yesterday) ÷ Yesterday × 100
Fuel 1.20 yesterday, 1.26 today: 0.06 ÷ 1.20 = 5%. An Inflation index of 1.12 is a level: prices are 12% above the base of 1.000.
2) How unusual is a move?
Professionals compare a move with that series' typical daily move, often called one sigma (σ). You can estimate it from your own reports: take a week of daily changes and average their size, ignoring the signs.
Size in Sigmas = Today's Change ÷ Typical Daily Change
Fuel's changes over five days: +0.03, −0.04, +0.05, −0.02, +0.06. Average size: 0.20 ÷ 5 = 0.04. A +0.10 move is 0.10 ÷ 0.04 = 2.5σ: genuine news. The same 6% move is huge for a series that usually moves 1.5% (4σ) and ordinary for one that moves 10% (0.6σ). Divide before you react.
3) Expectations and surprises
Many indicators tend to drift back toward their normal level after a shock; economists call this mean reversion. That gives you an expectation before the number prints.
Surprise = Actual − Expected
You expected confidence to print 46 and it printed 51: a surprise of +5. If its typical daily move is 2 points, that is 2.5σ, worth rethinking a plan for. Had it printed 47, the surprise of +1 would be 0.5σ: noise. Nowcasting is estimating current conditions from frequent data like this before slow official numbers arrive.
Quick self-check
(a) Fuel's typical daily move is 0.04 and it moves +0.10. How many sigmas? (b) You expected 60 and confidence printed 61, typical move 2. News or noise? (c) Which reading on your report is a demand signal: confidence or fuel? (Answers: 2.5σ; noise, 0.5σ; confidence.)
Common mistakes
- Reacting to levels. Plans should move on the surprise, not on what you expected.
- Treating a 1σ wiggle as a turning point. Moves that size happen all the time.
- Dividing by today's value. Percent change divides by the earlier value.
This week in the arena
Copy the Fuel reading from each of this week's reports into a small table. Work out the daily changes and their typical size, then size the week's biggest move in sigmas. Was it news, or noise?