Economic Jargon: What Does It Mean?

• Dollar Exchange Rate: The rate at which US Dollars can be exchanged for other currencies.
  Significance? A strong dollar relative to other foreign currencies may decrease US exports and increase imports from overseas and vice versa.

• Commodity futures (oil, corn, cotton, etc.): A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price.
  Significance? Futures prices change with respect to future economic and financial prospects.

• Dow Jones Industrial Average: A price-weighted stock index of 30 significant stocks traded on the New York Stock Exchange*.
  Significance? Reflects economic expectations; useful as a leading indicator on general economic conditions and business and investors' confidence.

• S&P 500: A market value-weighted stock index of 500 stocks chosen for market size, liquidity, and industry grouping.
  Significance? Reflects economic expectations; useful as a leading indicator on general economic conditions and business and investors' confidence.

• NASDAQ Composite: National Association of Securities Dealers Automated Quotations; a stock index of the common stocks and similar securities listed on the NASDAQ stock market consisting of more than 3,000 components.
  Significance? An indicator of the performance of stocks of technology and growth companies.

• Federal Funds Rate: The interest rate at which banks can borrow the funds held at the Federal Reserve from other banks.
  Significance? The federal funds rate usually affects other interest rates, including mortgage rates, credit card rates, and the interest that banks pay to customers.

• London Interbank Offered Rate (LIBOR): The interest rate at which banks can borrow funds from other banks in the London interbank market.
  Significance? Most widely used benchmark for short-term interest rates. It is the basis for how much interest is charged for loans to consumers and business; currrently calculated for 10 different currencies.

• Treasury Yield: The interest return on fixed-interest securities issued by the Treasury (e.g., 3-month Treasury bill, 10-year Treasury note).
  Significance? An indicator of the interest rate in different time periods and inflation expectations.

• Treasury inflation-protected securities (TIPS): The interest and principle payments rise with inflation, as measured by the consumer price index, while their interest rate remains fixed.
  Significance? A Treasury security that is indexed to inflation protects investors from the negative effects of inflation.

• Corporate yield: The interest return on fixed-interest securities issued by corporations (for example, bonds issued by Microsoft).
  Significance? An indicator of interest rate and corporate credit and default risk. Corporate yields are usually higher than Treasury yields with the same maturity because of the higher default risk of corporate borrowers.

• Term spread (i.e., yield curve): The difference between interest yields on securities with different maturities, typically the difference between a 10-year bond and a 3-month bill.
  Significance? An indicator of interest rate and inflation expectations. When the difference in yields is negative, it may imply a possibility of recession in the near future.

• TIPS spread: The difference between yields on Treasury security and TIPS.
  Significance? This spread gives an insight into bond market investors' inflation expectations.

• Credit spread: The difference between interest yields on different securities in relation to different credit quality, usually between yields on Treasury securities and corporate bonds.
  Significance? When the credit spread widens, it usually means investors are pricing in a higher level of risk. When credit spreads narrow, it is often an indication that capital is flowing more freely through the economy.

NOTE: *A price-weighted index is an index whose components are weighted according to the total market price oftheir outstanding shares.

 

Source: Article shared on TD Ameritrade. Their source: Some definitions are from Constable, Simon and Wright, Robert E. The Wall Street Journal guide to the 50 economic Indicators that Really Matter: From Big Macs to "Zombie Banks," the Indicators Smart Investor Watch to Beat the Market. New York: Harper Business, 2011.