Theory of economics

The performance of shorter-term bonds (those with maturities of up to two years) are directly impacted by central bank decisions and interest rate expectations. While the performance of longer-term bonds (those with maturities of longer than two years) are impacted by interest rates but also factors like inflation and economic growth, which can take longer to come into effect.

When these influences come into play, the shape of the yield curve can shift. It is these changes that analysts use to predict the economic outlook.

When the economy is growing, a positive upturn can be expected as a result of higher inflation. However, longer-duration bonds become riskier as there is increasing chance of rising interest rates. This means that bond investors will start to demand higher yields for lengthier maturities, resulting in long-term bond yields rising faster than short-term – producing a steep yield curve.

When the economic future becomes uncertain, the yield curve flattens. This is because short-term bond yields rise faster than long-term, as investors become indifferent to yields produced across all maturities and will accept the same for any bond.

If the yield curve becomes inverted – when short-term bonds yield more than long-term bonds – this can be seen as a sign that investors expect economic growth to slow sharply while inflation is low, and they therefore expect central banks to cut interest rates.

Production and manufacturing statistics. Production and manufacturing statistics can be one of the easiest and quickest ways to get leading data on the state of the economy. An increase in production and manufacturing outputs tends to have a positive impact on gross domestic product (GDP) figures, which is seen as a sign of increased consumption and positive economic growth.

A change in production levels can also have an effect on employment rates. The number of manufacturing jobs available can tell us a lot about how confident businesses are in their own expansion, and the economy. If there are a significant number of jobs available, companies might have an excess of orders they need to fill. But when they stop hiring, it means they are cutting back ready for a period of decline.

However, it is important to look at inventory levels and retail sales too. High inventory levels can suggest that consumer demand is up, but it can also indicate that produced goods are not leaving warehouses.