Bloomberg Answers Economic Indicators The Primacy of GDP (30 min.) Knowledge Check 1 How accurately do GDP statistics portray the economy and why? Knowledge Check 2 Consider the formula GDP = C I (X-M). A country is unde
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Bloomberg Answers Economic Indicators The Primacy of GDP (30 min.) Knowledge Check 1 How accurately do GDP statistics portray the economy and why? Knowledge Check 2 Consider the formula GDP = C I (X-M). A country is undergoing a boom in consumption of domestic and foreign luxury goods. In one year, the dollar growth in imports is greater than the dollar growth in domestic consumption. Assuming nothing else has changed, what happened to GDP? Knowledge Check 3 Here is the most important economic data for Australia and Sweden. Which economy did better year-over-year (YOY) in the fourth quarter of 2013 compared to the fourth quarter of 2012? Use the two charts to investigate. Knowledge Check 4 In the US, why is there a strong correlation between unemployment and GDP? SECTION QUIZ Here is a chart showing both nominal GDP growth and real GDP growth for a country. Which of the following can be a true statement at the time the chart was captured? Which of the following lines is the best leading economic factor? The “misery index” is often cited in the media as a way to measure consumer pain. It is defined as the inflation rate plus the unemployment rate. Review and identify the country with the highest “misery index.” What typically happens to nonfarm payrolls, the PMI indicator, and housing starts at the onset of a recession in the United States? Monitoring GDP (10 min.) SECTION QUIZ Which of the following qualities of economic indicators do investors prize the most? Why is the release of GDP statistics less interesting to investors than the release of other economic indicators? Which of the following important U.S. economic indicators is only available on a quarterly basis? Which economic indicator is most directly linked to unemployment? Forecasting GDP (20 min.) Knowledge Check 1 Here is the economic calendar for the UK for August 2013. Examine indicators like PMI, house prices, industrial production, employment, retail sales, and GDP. Based on these major indicators, how did the UK economy perform overall? Knowledge Check 2 This chart was captured in mid-2014. At that point in time, which of the following terms would have described the growth in the Chinese economy predicted in this pop-out table? Knowledge Check 3 How have economic forecasts for this economy evolved? SECTION QUIZ These charts show data for four countries as of early 2016. For each country, the purple line denotes historic real GDP growth. The white line denotes the consensus estimated real GDP growth. The red line denotes the most pessimistic analyst forecast. The green line denotes the most optimistic analyst forecast. For which country is there the most controversy among the analyst community about 2016 growth? What is the main reason that investment banks create estimates of economic indicators? Which of the following is the biggest pitfall of economic indicators? Here is a chart displaying estimates of the initial jobless claims indicator, one of the main unemployment statistics in the U.S. It measures the number of new applicants for unemployment benefits. What was the level of the analyst with the most optimistic outlook? Currencies Currency Market Mechanics (25 min.) Knowledge Check 1 Which country is both the fourth biggest importer and exporter? Knowledge Check 2 In 1994, the Mexican peso declined against the U.S. dollar during the so-called “Tequila Crisis”. What exacerbating factor did Mexico’s “Tequila Crisis” have in common with the Argentine crisis of 2002? Knowledge Check 3 Using the given chart, how many New Zealand dollars (NZD) can you buy with 100 Australian dollars (AUD)? SECTION QUIZ Allison lives in America and has just retired. It is early 2016. She has long had dreams of cruising the fjords on the west coast of Norway, visiting Buckingham Palace in the United Kingdom, seeing the cherry blossoms in Japan, and going to the top of the Eiffel Tower in France. She last considered all four options on New Year’s Day 2008. She would like to select the trip to go on based on which country’s currency has subsequently weakened the most against the U.S. dollar. Where should she go on vacation? Review the currency pair charts for the Barbadian dollar against the Jamaican dollar, the Czech koruna against the Polish zloty, the Nigerian naira against the Ghanaian cedi, and the Hong Kong dollar against the Macanese pataca. Which pair is pegged. Which of the following is NOT an example of a failed peg? Use the chart below to answer the question. How many Danish crowns (DKK) will buy 100 Japanese yet (JPY)? Currency Valuation (20 min.) Knowledge Check 1 According to this Big Mac index screen, which of the following four countries’ currency is the most undervalued? Knowledge Check 2 What generally happens when a central bank unexpectedly increases interest rates? Knowledge Check 3 Which driver weakened the Swiss franc? SECTION QUIZ What does the Big Mac index show? Which of the following are short-term drivers of currency valuation? By what mechanism do interest rates affect currency values? Which of these headlines could move a currency pair? Central Banks and Currencies (15 min.) SECTION QUIZ What is the most common target inflation rate for an advanced economy? What was the primary goal of Abenomics? Here is the deflationary cycle. What steps connect the lower left gray arrow to the upper right blue arrow? Were the two oil crises in the 1970s linked to deflation or inflation? Currency Risk (15 min.) Knowledge Check 1 On June 23, 2016, the UK voted to leave the European Union. The white line shows the UK’s main equity index, the FTSE 100, from the start of 2016 of the date on which the UK government notified the European Union of its intent to leave. The orange line shows the number the number of dollars it takes to buy one pound sterling. The UK is a net importer, meaning the value of imports exceed the value of exports. What can be reasonably surmised from the chart about large UK corporations? Knowledge Check 2 In early 2016, the same Germany machinery company has interest from four prospective clients from emerging markets: Indonesia, Brazil, Russia and South Africa. They all want to buy ten machines, but the factory can only produce ten in time. Therefore, the company has to choose only one client. Given the volatility of the domestic currencies of the four prospective clients, the CFO would like to choose the client which is least likely to cancel the order due to currency volatility. The invoice comes due on June 30, 2016. According to historical currency volatility alone, which prospective client would be least likely to cancel the order? Knowledge Check 3 What is the median estimate for the number of Japanese yen per euro for calendar year 2020? Knowledge Check 4 What is the different between Nomura and RBC’s estimate for the Japanese yen/euro currency pair for the end of Q1 2018? Knowledge Check 5 Imagine you are a Dutch diamond dealer who sources diamonds from South Africa. It is March 2016. A new mine is being dug in South Africa and you have agreed with the miner to buy one million South African rands’ worth of diamond a year from today. Therefore, you will need one million rands in cash in one year’s time. The miner wants you to demonstrate your commitment by either giving him a million rands now or providing that you have an FX forward contract for the full amount. Currently, the exchange rate is 17.1 rands to the euro. You check the forward rates on offer on the Bloomberg FRD function. You have two options. Exchange euros today at today’s exchange rate to pay him one million rands now, or lock in a forward agreement to convert euros to one million rands in one year’s time and share the forward agreement with him. If you were to do the forward instead of exchanging euros for rands today, approximately how much more or less would you end up with in a year? SECTION QUIZ Why would Jack Welch suggest putting all company plants on barges? Samsung is based in South Korea and reports in South Korean won. Samsung sells its products around the world and the geographic breakdown of its 2015 revenues is in the first chart. The other charts show how some major world currencies moved against the South Korean won through the course of 2015. Of the currencies shown, which currency movement boosted Samsung’s revenue growth the most? Legendary investor Warren Buffet said, “Gold gets dug out of the ground… Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Based on this quotation, what quality of gold is he referring to? Which of the following options is the best way for investors to manage currency risk? Fixed Income The Roots of the Bond Market (25 min.) Knowledge Check 1 What do the green bars at the bottom signify? Knowledge Check 2 According to the table, who owns approximately 1.3% of actively traded US debt? Knowledge Check 3 What quality of US government bonds causes investors to buy them when market volatility rises? Knowledge Check 4 Why is fixed income called fixed income? SECTION QUIZ Why does the United States have a strong reputation for creditworthiness? What is one reason why foreign governments lend to the U.S. government? What does one yellow bar depict in this debt distribution diagram? Which one of the following actors benefits when interest rates go up? Bond Valuation (50 min.) Knowledge Check 1 When investors doubt the creditworthiness of a borrower, how do they alter their calculation of the bond yield to take into account these doubts? Knowledge Check 2 As a general rule, what percentage of debt to GDP will make a government bond yield spike? Knowledge Check 3 What is true of both the UK and the US? Knowledge Check 4 Which would you prefer? Knowledge Check 5 Which would you prefer? SECTION QUIZ What is the primary reason for U.S. government bond yield to ripple through the bond market? A rise in which of the following measures would typically send a government bond price up? Which of the countries shown makes the greatest relative use of short-term government financing? How do investors compare bonds? Central Bankers and Interest Rates (25 min.) Knowledge Check 1 Which of the following is the strongest driver of inflation? Knowledge Check 2 This chart shows the output gap in the US from 1949 to 1973. What is the output gap in 1973? SECTION QUIZ Here is a chart from the ILBE function displaying U.S. 10-year inflation expectations as of early 2017. At the point in time shown, where is the country’s 10-year inflation expectation in relation to the Central Bank’s inflation target? Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do TIPS shield lenders from inflation? What is the Federal Reserve’s favorite inflation gauge? Here is the output gap in the U.S. in early 1975. What was likely the Fed interest rate policy? The Yield Curve and Why It Matters (15 min.) Knowledge Check 1 Why does the yield curve naturally slope upwards? Knowledge Check 2 Why did the corporate spread significantly widen during the 2008 market crash? SECTION QUIZ What impact will a tightening of the corporate spread most likely have on a company? What are the three main transmission mechanisms by which the yield curve affects the economy? What is the 10-year to 3-month term premium of the following yield curve? The purchase of which of the following products is most affected by interest rates? Movements in the Yield Curve (20 min.) SECTION QUIZ What is the primary driver of the left-hand end of the yield curve? Which yield curve is most likely linked to a booming economy? The two yield curve in the chart are from September 10, 2001 and from October 10, 2001. What do you think the Federal Reserve did with interest rates in the month following the attacks of September 11, 2001? Why does the yield curve tend to invert shortly before a recession? EQUITIES Introducing the Stock Market (25 min.) Knowledge Check 1 Why do companies do IPOs? SECTION QUIZ Why do company manager-owners smile when they ring the stock exchange bell at their IPO? The Dow Jones Industrial Average Index has an unusual weighting methodology. Unlike the S & P 500, it is weighted by share price. Here are 22 of the 30 members of the Dow Jones as of mid-June 2015. If all the shares went up by 5%, which share on
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