Industrial Production isn’t as fancy a term, as CPI, or PPI.
But we’re still defining it as usual:
It’s an economic indicator which measures the amount of production from industrial activities in a nation or economic region (or country).
Hmmmm, ok. So?
Don’t be mean.
This means the indicator leaves out sectors such as high-tech, agriculture, you name it…
But it does take into account utilities and manufacturing, among a few others.
Great, but why is this important?
Remember economists, Central Bankers, investors, and other statistics users are interested in knowing how an economy is faring.
Yes, we already have GDP as the “ultimate” measure of production in an economy, in a given period of time. But we need different measurements.
However, the most important thing is the release schedule.
GDP numbers come in quarterly.
Yes, there are estimates, but they’re usually revised (and with reason, its scale is massive).
So if you want a sort of “sneak peek” of how economic activity is faring, you’ll have to resort to other types of indicators which CAN be compiled more often.
Industrial Production is one such indicator.
It is released monthly. Thus, two months into a quarter, you would have a much clearer idea of how the economy is doing (tons of caveats here).
In many developed countries, where economies have moved more towards service oriented activities, the indicator won’t necessarily reflect overall production as well. But it remains a useful indicator.
Moreover, the indicator can also be used to get an idea of how inflation will end up.
Wait, isn’t this a “production” indicator? What does it have to do with inflation?
Remember that a very strong level of output (production) most likely means a strong level of demand in the economy (otherwise, why would a producer increase its output? -there are other possibilities, but let’s stick with this one)
Price increases (inflation) originate from an overheating economy (too much growth -too much output and an even greater demand).
People are buying more goods? Let’s produce more.
Thus, industrial production can be used as a signal of sorts, for a potential pick-up in inflation (or the contrary, a decrease of economic activity).
Awesome, but let’s get to what matters…. Making money trading forex.
Ok, so there are two major scenarios in which industrial production can be useful.
But wait, what do I mean by useful?
Times when the release of this data can create volatility in the markets (pip moves), and thus, gives you a chance at grabbing some of those in your favor (if you’re smart and not-unlucky).
The Central Bank is considering hiking rates in its next meeting two weeks from now, and is currently very sensitive to economic data (in order to inform its choice).
The best (or only) release which could indicate a pick-up in inflation before the meet is industrial production.
As you can see, the markets will pay special attention to this indicator under such a scenario, since it’s likely its results will have an impact on the interest rate of a currency.
This one is much more general.
A Central Bank is somewhat data-dependent for its decisions, but there is no immediate rate decision in the horizon.
The markets believe the Bank when it says it wants to hike (or cut) rates, but know the Bank’s representatives might hold off on the decision, or change their minds if data starts (or continues) to contradict their current stance.
In this case, volatility won’t necessarily be as strong as in scenario one, but you can still get some powerful movements if sentiment is particularly strong (in one direction) at the time data is released (and results don’t contradict said sentiment).
Industrial production isn’t a Tier 1 data release for nothing.
As always, you must know what a Central Bank is paying attention to at the time, but also, whether the markets believe the Bank will act on said data.
You’ll get the hang of it with practice.
See you soon,
The Forex Economist
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