Macro stands for macroeconomics which is an overview of how economies function. Knowledge of the macro factors that affect an economy will help in understanding the current state and future outlook of an economy.

Macro concepts

There are five stages in the business cycle. During the expansion phase, the economy grows and employment, wages as well as company profits rise. Growth continues until it peaks. At the peak, employment, wages and profits are high but do not increase further. Demand starts to fall due to the high prices and the decline accelerates until the economy eventually moves into a recession. During a recession, economic production, company investments, employment and wages fall. The economy eventually bottoms out at the trough, setting the stage for a recovery to take place.

Equities, especially cyclical sectors (e.g. Consumer Discretionary and Industrials), as well as corporate and high yield bonds tend out outperform during the recovery and expansion phases. Government bonds and defensive equity sectors (e.g. Consumer Staples and Utilities) may fare better during recessions.

The Purchasing Managers’ Index (PMI) is a leading indicator of how the economy is faring. It is based on a monthly survey of senior executives across multiple industries. The survey includes questions on new orders, inventory, production, supplier deliveries and employment.

The PMI ranges from 0 to 100. A reading above (below) 50 represents an expansion (contraction). A reading at 50 indicates no change.

Trade is the exchange of goods and services between countries. We can track trade by looking at imports, exports and export orders. Export orders are orders placed for future goods that are meant to be exported and can be viewed as a leading indicator for manufacturing activity and economic growth.

More trade means more goods and services are being produced and consumed, which is positive for the economy. Trade tensions between large countries (e.g. China and US) can slow down global trade due to the multiple links in the supply chain located in other countries. This is negative for the global economy.

Oil prices reflect the demand and supply, as well as the market sentiment for oil. A higher oil price suggests that the demand for oil is strong, which in turn implies that the global economy is healthy. That said, in recent years, oil prices have also been influenced by new sources of oil such as shale as well as political decisions relating to US sanctions on selected oil producers.

Higher oil prices hurt (benefit) countries that are oil importers (exporters). Oil importers often subsidise oil prices in their domestic economy. Therefore, high oil prices can hurt their current account balances and weaken their currencies.

Inflation measures the change in the level of prices. When inflation rises, the amount of goods/services which can be bought for the same amount of money falls, so the currency may weaken as a result. Central banks may raise interest rates (to help support the currency) when inflation is high. When prices fall persistently, consumers (companies) may delay spending (investing) decisions which can in turn slow economic growth. In such situations, central banks may cut interest rates to encourage economic activity.

When inflation is rising, equities tend to outperform bonds. Within bonds, corporate and high yield bonds are likely to fare better than government bonds, as they benefit from stronger economic growth which typically accompanies rising inflation. Inflation-linked bonds, where the principal and interest payments rise and fall with the rate of inflation, help protect investors from inflation.