From the Federal Reserve Bank of New York's Liberty Street Economics blog:
What’s News?
Economic news moves markets. Most analyses find that economic news is incorporated quickly (within minutes) into asset prices, with some measurable persistence of these effects, and with some spillovers across national borders. Some types of announcements—for example, U.S. nonfarm payrolls announcements—generate much larger asset price responses than others. Generally, news that is more timely, is more precise (being subject to smaller revisions on average), and contains more information (being better able to better forecast GDP growth, inflation, or central bank policy decisions) has a larger effect on asset prices.
The magnitude of the effects of economic news is often discussed as if there is an underlying “rule-of-thumb” relationship, for example, that a payrolls “surprise”—the part of an announcement not already expected—might move a particular asset price by some fixed number of basis points for every 10,000 units of surprise. Yet in a new study, we argue that there is little reason to expect that the relationship between economic news and asset prices should be stable over time.
Why Time Variation?
The time variation could be generated for a number of reasons. For example, it could arise in relation to market views of how the central bank will react to the news. At different points in time, the expected policy outcome of news can change due to a perceived reweighting of inflation and output preferences within policy reaction functions, changing implications of a unit of news for forecasts of output or inflation as the state of the economy shifts closer to or moves further from targets, changing risk preferences in the economy, or the perceived importance of financial stability conditions leading to a (short run) shift of priorities of the central banks. The difference in the effect of a “unit of news” on asset prices can be quite large at different points in time.
To show this more concretely, the study looks at high-frequency asset price data over an eleven-year interval, focusing on data releases that have announcement times of 8:30 a.m. EST. We examine the effects that announcements of the CPI (total and excluding food and energy), the change in nonfarm payrolls, the unemployment rate, GDP, housing starts, PCE core, personal income and spending, retail sales less autos, and the empire manufacturing survey have on asset prices. The surprise components are constructed using expectations data from weekly surveys of market participants (conducted by Money Market Services, a division of Standard & Poor's, for the early part of the sample, and from Action Economics or Bloomberg News more recently)....MORE
