How Do You Know When News Is Priced In?

It all comes down to expectations. If you know what the market expects, you know what's been priced in.
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Economic News Priced In

We have a quick question here from Jamil asking when to know or how to know when a particular news event has been priced into the market.

Looking at pricing and versus not priced in at all basically comes down to the market expectations.

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So when we are referring to something being priced in like an economic event or a central bank policy event, we’re always referring to the current expectations or the current consensus for that specific event. When we’re looking at an event, we always need to look at what the market is expecting from the event and also include the range of expectations.

So if we know, for example, that the market is expecting a print of negative 22 million, for example, we know that the range of expectations currently is sitting between negative 35 million and negative 1 million.

We can with a high probability expect that those numbers, whether that is the consensus or the range of expectations that is largely by this stage already been priced into the market. So anything within that range can obviously still cause volatility depending on the full cost of distribution. But it shouldn’t come as a major surprise if we print anywhere within that particular range.

Coming to something like the full cost of distribution, this is important to understand as well because the range of expectations only takes the lowest, which in this case is negative 1 million as well as the maximum or highest, which is negative 35 million into account. So it doesn’t take a mean or an average of the high or the low. It basically takes the lowest and the highest number.

So let’s say that one analysts, for example, expects a print of negative 35 million, but 90% of all the other analysts are basically. Or let’s just say the vast majority of analysts are expecting a number close to let’s say 20 million, then I print off 35 million can still be expected to have a bigger impact and it is much less priced in compared to something like a 20 million print. So that means we can expect some price readjustment if we do get a print close to, let’s say, negative 30 million or negative 35 million just because it’s only at this stage expected by one or two analysts.

Of course, when it comes to something like a central bank policy event, the process basically works very much the same. Let’s say 90% of markets are expecting a rate cut from the Fed, right? That would mean that the event is 90% priced in for a cut.

Now, if the odds of a hike basically is sitting at 60%, we would say that that hike is 60% priced in. If it’s sitting at 40%, we’ll say it’s 40% priced in, just as an example. So the higher or lower the expectation, obviously will determine the size of the potential surprise as well.

So for example, let’s say a hike is 100% priced in by the markets, right? But the bank decides not to hike, they actually decide to keep rates on hold.

That’ll probably have a much greater impact and reaction compared to a decision that was 50, 50 going into the event because all those traders that will reposition for the 100% hike, they will need to unwind and change their positions.

Whereas with a 50, 50 event or a 50, 50 probability, you probably had a lot of traders that were sitting on the sidelines anyway and they basically waited for the event to trade. So there might be a bigger reaction from a fully priced in event that changes completely to something that’s just 50, 50.

So let’s take something like a global recession, for example. There will always be lots and lots of ambiguity on when something like a recession is fully priced in and when it’s not. So when is the bottom in and when isn’t it in?

Those events are very as much more speculative and thinking of priced in or not in those terms aren’t really that helpful as the amount of uncertainty makes it almost impossible for you to know for sure whether something like a recessional or a downturn, whatever has been priced in or not. So that is basically just what we mean when we say something is priced in.

We basically look at the data, we look at what the markets are currently expecting. And those are the ways that we can use to know when something is priced in or not. And of course, when a reaction is to be expected when the expectations are basically changed when we have a very big deviation between the actual data or the actual central bank policy between those expectations going into the event.

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