How alternative macro data helps investors navigate volatile markets

Volatility is back.

In the years after the Great Financial Crisis of 2008, markets were characterised by rising stock and bond prices, together with ultra-low volatility.

The status quo has been dramatically overturned in the period since the pandemic, thanks to surging inflation, supply chain crises, war in Ukraine and the rapid rise in interest rates.

Last year saw stocks and bonds fall in unison in one of the biggest public market sell-offs in history — and there is no sign of volatility fading in 2023.

This turbulent backdrop means alternative data focused on macro trends — from inflation to labour markets to central bank policy — has never been more popular.

Investors including macro hedge funds, which make bets based on macroeconomic trends, are key users. But in such a volatile environment, it is important for investors of all stripes to be on top of macro trends — hence the demand.

The Neudata platform is ideally positioned to help. A quick search on the platform shows more than 750 individual dataset research reports by data vendors featuring ‘macro’ information.

Read on to discover the value macro data can add. This article will cover:

• What is macro data?
• Types of macro data
• Use cases and vendors
• The macro outlook
• How can Neudata help?

What is macro data?

Macro data is best thought of as a wide-ranging set of indicators which help users determine the macro-economic outlook.

When will US interest rates peak? How quickly will UK inflation fall? Will the eurozone labour market tighten in the coming months?

These are all questions which macro data can help with. Definitive answers will only emerge with the passage of time — but if hedge funds and other investors forecast correctly, their trades can make millions of dollars in profit.

That means they have big research budgets to spend on alternative data.

Let’s take inflation as a timely example. Rising prices have rarely been out of the news in recent months, with many major economies afflicted by double-digit inflation.

For ordinary citizens, this has meant a cost-of-living crisis. For those in financial markets, inflation is a hot topic again after years of low and stable prices.

There is now a big marketplace for alternative data which can indicate where inflation, tracked by governments using measures like the UK’s consumer price index (CPI), will head next.

The Neudata platform lists vendors including dotdat, DecaData and Turnleaf which offer data products for CPI signals built from various alternative sources.

“Nowcasting” inflation with high-frequency data has seen a surge in demand since prices started to spike in 2021. Data providers generate estimates based on prebuilt inflation signals released ahead of official statistics and the datasets that can be used as components for CPI modelling.

Web-scraping is an important alternative data tool when it comes to gauging price moves. PriceStats, considered a market leader for CPI signals, tracks significant price changes from web-scraped online prices.

Other providers use surveys and other means to track inflation from prices which are not listed online.

Types of macro data

Inflation is just one of many macroeconomic themes which alternative data can help users to better understand.

Others include interest rates, economic growth, labour markets, currency prices, volatility and consumer spending.

These themes have rarely been out of the headlines in recent months, as governments and central banks grapple with inflation and the risk of recession.

That explains why more hedge funds have been capitalising on this market volatility by expanding their macro trading capabilities.

Use cases and vendors

We have already explored inflation. In this section we will look at five more macro themes through the prism of alternative data, discover use cases and mention some of the vendors available on the Neudata platform.

1) Volatility is a reflection of uncertainty about macroeconomic outcomes. There has been a lot of uncertainty in the past couple of years, sparking a revival of interest in vendors that measure market volatility.

One use case concerns commodity prices, which have displayed immense volatility of late. Hedge funds use alternative data to trade on the volatility of commodity derivative contracts, equities or relevant indices.

Techniques like natural language processing (NLP) can also be invaluable to volatility trading use cases. A stock’s price volatility is driven by market sentiment, so NLP is regularly applied to stock-related content, from news articles to earnings calls, to quantify and predict that exact market sentiment.

Typical vendors in the vol space offer volatility metrics at the security and sector level, or provide historical prices and implied volatilities data in several asset classes and structures globally.

2) Interest rate policy is set by central banks, which have varying levels of autonomy from governments around the world.

Inflation is obviously a key consideration for interest rate policy, and the section above is relevant to users trying to forecast central bank moves. But, going further, there are vendors like DeepMacro which aggregate alternative and traditional data to build early signals of macroeconomic performance and use this to build proprietary central bank indicators.

Another vendor listed on Neudata’s platform offers hawkish/dovish indicators across 16 central banks.

This type of information helps hedge funds which trade on interest rate direction using complex fixed-income trades (interest rates are inversely related to bond prices in fixed-income markets, where interest rate sensitivity is measured by duration).

3) Labour markets are a key macroeconomic indicator, providing insights into the health of an economy, unemployment levels and consumer spending.

Gleaning hiring information from job postings, aggregated on an industry, regional and national level, has been popular for years, giving insights into changing labour market conditions.

LinkUp is considered a market leader in this space, offering global coverage and a long historical point-in-time dataset.

Other vendors include Greenwich.hr, which recently expanded its coverage to include data on more countries. The group claims to capture pay data for 80% of job postings it crawls.

Layoffs, temporary staffing activity, business surveys and payroll data are among the other sources of information used by alternative data providers.

4) Consumer spending is another key macro indicator which helps build a picture of economic health and future performance. Transactional data (sourced from credit/debit cards and e-receipts) is a very popular alternative dataset source in this space.

Breaking down the data by region or sector can be useful for forecasting consumer spending indices and retail sales.

One very popular vendor on Neudata’s platform offers anonymised banking, debit card and credit card transaction data from 20m monthly consumers, updated daily, while another offers point-of-sale data for consumer packaged goods, covering 900k stores across 85 countries.

5) Currency prices are a key asset class for many macro hedge funds, not least because FX moves are heavily influenced by macroeconomic trends.

Traders build a picture of national and international economic shifts in order to bet on which way different currencies will move.

Much of the data we have mentioned above will help in this regard, from central bank insights to inflation nowcasting. Macroeconomic data vendors typically do not map their data points to a specific FX instrument, putting the onus on the end-user to form conclusions — bread and butter for currency-focused hedge funds.

The macro outlook

Volatility is back, and understanding macro trends has rarely been so important. Will that remain the case?

There is a consensus in the financial community that volatility is not going away — just look at the US regional banking crisis, the demise of Credit Suisse and market wobbles this year.

Former hedge fund manager Mike Novogratz believes the next five years will be a golden age for global macro — the strategy he left behind when he moved into crypto.

“We are probably going into what will be three to five years of the golden age of macro,” he said last year at a conference in New York.

“For the last 15 years we have had this great moderation of low inflation and low volatility in currencies and interests. And all that’s changed.”

How can Neudata help?

Neudata is an alternative data-focused research platform that specialises in the objective and neutral assessment of  and datasets. We help institutional investors, corporations and leading global organisations find the most relevant alternative data sources to use in their internal data ingestion processes.

Our platform is the global authoritative source for unbiased, independent alternative data intelligence.

We don’t buy or sell data, or require data providers to pay us a revenue-share or commission in exchange for recommending their products to data buyers. That means you get unbiased intelligence that’s tailored to your specific research goals and strategies.

Since 2016, we have helped our clients understand the landscape of available datasets, increasing the efficiency of their data spending budgets. Neudata’s data buyer clients represent 60-70% of industry-wide spending on alternative data.

If you are a data provider/owner and want advice on selling or monetising your data assets, or if you’re a potential buyer looking for an introduction to the alternative data landscape, contact info@neudata.co to discover how Neudata can help you achieve your goals.