It is well-known that changes in US interest rates can have a major impact on global financial markets, but how does other US economic news affect the rest of the world? In new research, Christoph Boehm and Niklas Kroner find that global stock prices jump immediately, and in a synchronized way, to news releases about changes in the US economy and that US monetary policy can have a stabilizing role following such releases. In contrast, foreign economic news releases have little to no effect on US markets.

In today’s interconnected world, countries’ stock prices often rise and fall in tandem. For instance, the world saw a global decline in stock markets during the COVID-19 pandemic, followed by swift recoveries for most countries. This co-movement has existed for several decades and is a broad phenomenon which largely holds globally. Further, it is not limited to stock prices. Research has documented that countries’ gross capital flows, leverage, and credit all tend to move together. Financial conditions in different countries thus have an important common component: at certain times, they are favorable around the world, while at others, they become globally unfavorable. This co-movement of financial conditions has been termed the global financial cycle.

What is less clear, however, is what drives the global financial cycle. With the central role of the US banking system and the dollar’s status as the dominant global currency, the policy of the US Federal Reserve (which sets US interest rates) is known to affect financial conditions globally. In new research, we show that the US’ special role extends well beyond monetary policy: news about US economic activity itself plays a large and distinct role in driving global financial conditions. Hence, when the US economy does well, global financial conditions also tend to be good.

High-frequency analysis of US economic news

Although commentators often attach plausible narratives to financial developments and developments in the wider economy (also known as the macroeconomy), it is typically very difficult to accurately determine the causes and effects in economics. This is because most financial and macroeconomic outcomes are interdependent. For example, if an economy’s growth is accelerating, then this acceleration is likely to lead to higher stock prices. The higher stock prices, however, will then feed back into overall economic growth, for instance, by affecting consumption and investment decisions. To deal with this “simultaneity problem”, in new research, we studied the effects of macroeconomic data releases in the US on global asset markets. Since data collection efforts for a particular macroeconomic outcome have been completed at the time of the announcement, the published release cannot be impacted by such feedback anymore. This leaves only one possible direction for causality: news releases of macroeconomic data can affect stock prices, and we show that this is indeed the case.

Our research shows that after US macroeconomic news releases, global stock prices respond immediately and in a synchronized way. For instance, higher-than-expected nonfarm payroll employment – one of the major US economic news releases – leads to an increase in stock prices in essentially all countries in our sample (see Figure 1 for a select subset). These effects are also large. Foreign countries’ stock prices respond with magnitudes like that of the US stock market.

Figure 1 – Effects of US news on foreign stock markets, by news type and country

Notes: Bars show the effect of a one standard deviation surprise in the data release. Thin red lines represent 95% confidence intervals. All measures the average effect of 27 countries. Sources: Authors’ calculations using data from Bloomberg and LSEG Workspace.

Why is it that global stock prices respond so much to surprises about US macroeconomic data releases? To answer this question, we studied a variety of additional asset prices and related measures – such as the VIX index, which is often interpreted as a gauge of risk and uncertainty. It turns out that whenever global stock prices rise after US macroeconomic news releases, investors’ perceived risk and uncertainty falls and so do prices of relatively safe assets such as government bonds. This behavior suggests that investors are more confident in holding riskier assets when the US economy is doing well, and that positive news about the US macroeconomy triggers the onset of such “risk-on” periods. The flipside, of course, is that bad news about the US economy can lead to a global stock market panic as was the case during the global financial crises in 2008 and 2009.

Photo by Maxim Hopman on Unsplash

Interestingly, US monetary policy, which has often been blamed for fluctuations in global asset markets, appears to have a stabilizing role after US macroeconomic news releases. When bad news about the US economy becomes available, markets expect the Federal Reserve to lower interest rates, which partially offsets the decline in global stock markets and thus stabilizes both asset markets and the economy. In the absence of the Fed’s decisive policy, which combats downturns and prevents economic overheating, the effects of US news on global stock prices would likely be worse.

The central role of the US 

One of the most striking findings from our study is that the US is a clear outlier in terms of the effects of its news releases. While US macroeconomic announcements have large effects on foreign stock markets, the reverse is not true. Foreign economic news releases have little to no effects on US markets. This is the case for Japan and Germany, two relatively large economies, and the UK, an important financial center, as well as several other countries. In comparison to the US, the effects of these countries’ news releases are minimal. This difference highlights the special role the US economy plays in the global financial and monetary system.

With the recent turbulence in global tariff policy and the deteriorating US fiscal outlook some have speculated that the transition towards a new center of the global financial system has accelerated. In such a scenario the dollar would ultimately lose its dominant currency status and be replaced by the euro, the renminbi, or by multiple currencies in a multipolar system. Given how central the US economy is to most market participants and that there is no alternative that matches the US in the relevant dimensions, such a transition is still very difficult to imagine. Should it ultimately happen, however, it is unlikely that many countries would emerge from such a transition unscathed: news about the US economy has a strong tendency to move asset prices and financial conditions globally.

• This article is based on the paper, ‘The U.S., Economic News, and the Global Financial Cycle’, in The Review of Economic Studies. 
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• Note: The views expressed herein are solely those of the authors and should not be reported as representing the views of the Federal Reserve Board, the principals of the Board of Governors, or the Federal Reserve System. They also are not the position of USAPP – American Politics and Policy, nor the London School of Economics.