Where should a company set its production plans and what are the main market risks associated to this project? Will the economy experience a recovery in 2010? Etc. Economists try to answer this kind of questions by studying statistics, testing models and making forecasts. For such a job, you need a strong economic background with a global and historical view about economic and market events. Thanks to this specific knowledge, the economist can make sense about data. In a rich-data environment, economists provide a specific insight because they can identify lagged and advanced indicators. To do so, they use and compile sources regularly: the economic press, statistical data, surveys and reports from institutes or research centers, etc. From their analyses, economists writes speeches, working papers and makes financial and market studies and/or conferences to influence asset allocation and market strategies for instance.
A typology of macro-economists
There are different types of economists. To put it in a nutshell:
* Accounting economics or public economists who produce statistics for public institutions (ex: INSEE in France)
* Researchers (university world)
* Classical private economists who are mainly focused on structural surveys or short-term indicators (ex: economic departments in banks)
* Market economists who have quite the same job than the previous ones but are closer to the decision process in financial market. They are often locating in trading rooms. They draw links between fundamental analysis and financial development in order to guide asset managers, financial analysts and traders. A market economist has both theoretical and empirical insights and he or she tries to make it usable and understandable by most market participants.
What means being a market economist?
In business dictionaries one may find that a market economist is “a person who is specialized in the study of financial structures and the return on investments in the stock market”. In my apprenticeship (I am currently working with a market economist in an insurance company), it appears that the macro-economic background is at least as important as the financial knowledge. If asset classes and asset mechanisms have to been known, Taylor's rule or Phillips' curve do not have any secrets for the market economist who is used to link economic data with financial markets (for instance, the output gap and bond yields).
What an ordinary day for a market economist looks like? According to my experience, I could say that there are various daily tasks. The first one is to update databases. My tutor has a weekly global scenario to prepare for giving a macro-economic point of view to asset managers and sales. Moreover, he publishes bulletins on foreign countries where subsidiaries are installed in order to help the decision-making. The market economist must have a strong conviction on the future path of the economy in order to have a coherent message. For such things he or she is focused on leading indicators such as the slope of the yield curve, monetary aggregates, productivity…He or she is interested in inflation (more core inflation than headline inflation), in nominal and real variables, net and gross numbers and should make the link between short term data and long term economic developments.
For instance, my tutor has identified with colleagues the sterling/yen indicator (it is the exchange rate between these two currencies), which is, according to them, a coincident indicator or when it's not, a leading one for stock markets. The idea is that the currency market – where market participants react rapidly to economic developments – might be sometimes leading the equity market – which are more sensitive to corporate profit news that are published with a lag.
As the chart shows, if the “sterling/yen” decreases, the CAC 40 index tend to do the same, and reciprocally.
From August to December 2008, the two curves have the same trend at the same times. Then, the sterling-yen is increasing and the CAC 40 index does the same about two months later. Consequently for my tutor and his colleagues, this indicator is one within others that they follow in order to forecast stock markets trends thanks to economic data.
To find all these data, there are several sources. In my company, Datastream is the most important one, then Bloomberg, official publications (by the Fed, IMF, OECD, etc.), institutions’ web sites and economists’ blogs, survey by statistic institutes (INSEE, Department of Commerce, etc.) and other information given by partnerships (JP Morgan, Deutsch Bank, etc.)
If the process could seem to be repetitive – find sources, find documents, make the link between all the data and write a synthesis of it in order to support your argumentation – curiosity, intuition or insight, charisma and persuasion are the most important qualities in order to be a credible market economist. As an inquiring mind, the market economist is on quest of information; he or she should have a good capacity for synthesizing (to be able to gather various elements and make them a relevant unit). A market economist should be both listening and be persuasive: he or she should have strong convictions and specific messages but at the same times avoid dogmatism. The financial crisis has shown how important it is to call oneself into question nearly permanently.