Guide
You run a trading desk with $10,000, a stock fund and a bond fund. Over 20 release days, about 5 months of the real economic calendar, the data comes out against the consensus forecast, and the rest of the calendar comes out in between. Markets move on the surprise, not the number. Your Research Department tells you the day before what it expects. Trade the surprise, read the business cycle, and finish ahead of the market.
A release day
Each turn is a release day, when the most-watched data comes out: ISM, the jobs report, retail sales and inflation, and the last week's jobless claims with GDP. The game jumps from one release day to the next, and the rest of the real calendar comes out while you wait: weekly jobless claims, the regional Fed surveys, housing, durable goods, consumer confidence and more, 15 releases a month plus the weekly claims, each on its real schedule. They move prices, but you can't trade until the next release day. You start the day before the first release, in cash.
- Today
- The day's releases, each with its consensus, your forecast, the actual number, the surprise and what it did to stocks. Below them, how far the day's news moved the 10-year yield, bonds and stocks, and how far the markets moved in the trading days since the last release day. Open that line to see the releases that came out in those days.
- Next release day
- What comes out next: the consensus and your Research Department's forecast. This is where your edge is. The Full calendar link shows every release in the session.
- Markets and trading desk
- Both funds' prices over the session, each with today's move on the news and its move since the last release day (which also holds the trading days in between, so the two can differ in sign), the 10-year yield, what you hold, and the buy and sell buttons.
- End day
- In the bar at the bottom. It moves the markets to the next release day's close. The session ends after release day 20, with the debrief.
Consensus, your forecast and the surprise
Consensus is what economists expected, and it's already in the price. The surprise is the actual number minus consensus, measured in standard deviations (SD): 1.0 SD is a typical miss for that release. Payrolls, for example, typically miss by about 80,000 jobs.
Your forecast comes from your Research Department. It's better than consensus but not perfect: it gets the direction of a surprise right about three times in four. A real edge is a tilt in the odds, not a certainty.
What moves the markets
Each surprise moves the 10-year Treasury yield and stocks. The bond fund follows the yield: its duration is 5.8, so each 1 basis point (bp) rise in the yield takes about 0.058% off its price. At level 1 the Fed isn't worried about inflation, so stronger data is good for stocks (better earnings ahead) and bad for bonds (higher yields).
| Release | 10-yr yield | Bonds | Stocks |
|---|---|---|---|
| On release days | |||
| Nonfarm Payrolls | +4.8 bp | −0.28% | +0.42% |
| ISM Manufacturing PMI | +2.9 bp | −0.17% | +0.25% |
| Retail Sales | +2.1 bp | −0.12% | +0.06% |
| GDP (advance) | +1.8 bp | −0.10% | +0.39% |
| Initial Jobless Claims (higher is weaker) · hints at Nonfarm Payrolls | −1.5 bp | +0.09% | −0.02% |
| Consumer Price Index | +0.8 bp | −0.05% | −0.02% |
| Minor releases (Construction Spending, Business Inventories, and Leading Economic Index) | about 0 | ||
| Between release days | |||
| ADP Employment Report · hints at Nonfarm Payrolls | +1.0 bp* | −0.06%* | +0.05%* |
| Trade Balance | +1.0 bp | −0.06% | +0.05% |
| Factory Orders | +0.3 bp | −0.02% | +0.20% |
| Michigan Consumer Sentiment · hints at Retail Sales | +1.4 bp | −0.08% | +0.21%* |
| Producer Price Index | +0.2 bp | −0.01% | −0.02% |
| Empire State Manufacturing Survey · hints at ISM Manufacturing PMI | +1.0 bp | −0.06% | +0.09%* |
| Industrial Production | +0.7 bp | −0.04% | −0.01% |
| Capacity Utilization | +1.6 bp | −0.09% | +0.01% |
| Housing Starts | +0.1 bp | −0.01% | +0.03% |
| Philadelphia Fed Manufacturing Survey · hints at ISM Manufacturing PMI | +1.9 bp | −0.11% | +0.16%* |
| New Home Sales | +0.8 bp | −0.05% | +0.04% |
| Durable Goods Orders | +0.7 bp | −0.04% | +0.12% |
| Consumer Confidence · hints at Retail Sales | +0.8 bp | −0.05% | +0.21% |
| Personal Spending | +1.6 bp | −0.09% | −0.03% |
| Chicago PMI · hints at ISM Manufacturing PMI | +2.2 bp | −0.13% | +0.19%* |
These sizes come from published studies of how markets react to announcements: yields from Gilbert, Scotti, Strasser and Vega (Federal Reserve, 2015), and the Empire State survey's from Goldberg and Grisse (New York Fed, 2015); stocks from Andersen, Bollerslev, Diebold and Vega (2007), measured in a period when the Fed wasn't worried about inflation. Figures marked * aren't in those studies and are estimated from the closest release that is. Payrolls moves markets most, and inflation data barely moves them while inflation is calm. Several releases on one day add up.
Previews. Some releases between the release days hint at one to come, as traders use them: the Empire State, Philadelphia Fed and Chicago surveys at ISM, weekly jobless claims and ADP at payrolls, and the consumer surveys at retail sales. Each shares part of that release's surprise, so a run of weak previews makes a weak number more likely. The board marks them. The regional surveys come out in time to trade on before ISM; ADP and the Chicago survey usually come out after your last chance to trade before theirs.
The business cycle
Behind the data, the economy is in a slowdown or a recovery, and at some point in the middle of the session it turns. You aren't told which, or when. In a recovery, stocks drift up and the 10-year yield rises; in a slowdown, stocks drift down and the yield falls as the Fed eases, which lifts bonds.
Consensus looks backward: economists extrapolate the last few releases. So after the economy turns, the data keeps surprising them the same way for a while. A run of growth numbers above consensus says a recovery is under way, and a run below says a slowdown. A news headline may come first: news can move markets before any data shows it.
Trading
- Trades fill at the day's closing price, after the day's releases. Enter a dollar amount and choose Buy or Sell, or use Buy all and Sell all.
- Every trade pays 0.1% commission, so switching all your money from one fund to the other costs about 0.2%. Trade when your forecast or the cycle gives you a reason.
- Level 1 is long only: you can't sell more than you hold or borrow to buy.
- From level 2 you can sell short (below).
Level 2: the Fed worries about inflation
At level 2 the Fed is watching inflation, so good news is bad news. Strong data means the Fed will raise rates, and higher rates lower both bond prices and the value of stocks. So strong data sinks stocks and bonds together, and holding one no longer hedges the other. CPI and PPI move markets far more than at level 1.
The economy is overheating or cooling, and turns once in the middle of the session. Overheating: growth and inflation data come in above consensus, the Fed raises rates, and both funds drift down. Cooling: the data comes in below, the Fed relaxes, and both drift up.
- Sell short to profit when a fund falls: you sell shares you don't own and buy them back later. A fund is held or shorted, not both, so sell a holding before shorting it.
- The sale's proceeds stay in your account as collateral: they count in your net worth, but you can't spend them. Buy to cover buys a short back.
- Shorts can total up to 200% of your net worth, and pay a borrowing fee of about 2.5% a year.
- Margin call: a short can lose more than it raised. If your net worth falls below 30% of what your shorts would cost to buy back, your broker buys them all back at that day's close.
- You still win by beating a balanced portfolio and finishing with a gain. When both funds fall, the balanced portfolio loses money, and finishing up takes cash or shorts.
Level 3: shocks and surprises
Level 3 is the real setting: everything from levels 1 and 2, and the most uncertainty. The economy starts calm, and partway through it turns one of four ways. You aren't told which.
| Inflation steady | Inflation rising | |
|---|---|---|
| Growth up | Recovery: stocks rise | Overheating: the Fed raises rates, both funds fall |
| Growth down | Slowdown: the Fed eases, bonds rise | Supply shock: prices up, output down, both fall, stocks harder |
- The news may mislead. A headline comes a day or two before the turn, and one time in three it points to the wrong world. The market reacts to it anyway. Whether growth and inflation data beat consensus is what tells the worlds apart.
- The Fed meets three times and announces a rate change against what the market expects. A surprise moves both funds like any release.
- Buy on margin: enter more than your cash to borrow the rest, up to 100% of your net worth, at about 6% a year. If your net worth falls below 25% of your holdings, your broker sells to repay the loan.
- A clock on each release day: 60 seconds. The releases come out as it starts and prices take in the news quickly, most of it in the first several seconds, so a fast, right read of the surprise earns part of the move. Trades fill at the price of the moment, and how the market took the news shows when the clock runs out. At zero the day ends. You can turn the clock off in Account; then the day waits and trades fill at the close.
- To win at level 3, beat the better of the two funds, held all session, and finish with a gain.
The debrief
After the last release day, the debrief says whether you won. You win by beating a balanced portfolio (half stocks and half bonds, bought on the first day and held) and finishing with a gain; at level 3, by beating the better of the two funds. Doing nothing never wins, and neither does matching the market. The debrief also compares your result with holding stocks, holding bonds, and a trader with perfect hindsight. It splits your profit into release-day calls and positioning between releases, reveals the cycle and when it turned, and explains the biggest moves. Replay the same seed to try again on the same market. Click the level in the header to see the game's seed, for example to check it's the one your professor assigned.
The economics: IS-LM
The IS-LM relationships taught in MBA macroeconomics give every move a reason. Stronger demand (spending, jobs, orders) shifts the IS curve right: output and interest rates rise. Rising rates lower bond prices. For stocks two forces pull against each other: better earnings lift them, and higher rates lower them. When the Fed isn't worried about inflation, as at level 1, earnings win. At level 2 the Fed is worried, rates matter more, and strong data can lower stocks: "good news is bad news".