Does the market adjust for effects of announcement before formally announced?

Question

Example:

Assume that the Fed has made an unofficial announcement that it will raise interest rates and the Fed is going to formally announce this tomorrow. Because Bernake hasn't formally announced the rate hike, but everyone knows it's going to happen, does the market react to the news after the informal or formal announcement?

Same can be said regarding unemployment figures, earnings reports or contract awards.

So...does the market react only after the formal announcement? If so, it seems a good opportunity for speculators to make some money.

Answer 1

There is no 'unofficial' announcement. In all the examples you cite (unemployment, earnings, Fed movements) the market has built in an expected or consensus number. When the official announcement is made the market reacts IMMEDIATELY (if you don't believe this then find an opportunity to see real time stock index futures prices such as the S&P futures traded at the Chicago Mercantile Exchange or the Dow futures traded at the Chicago Board of Trade). These markets will move as soon as the Fed makes it announcement tomorrow.

Given this, I don't know speculators would make money that isn't already made by current market participants such as exchange members who are trading these contracts electonically. They have instant access to these markets and know as quickly as anyone what the news is. Even given this advantage it's very difficult to make money as a trader. The competition is extreme, it's easy to lose money and hedge funds with an unlimited technology budget have a technological edge over run-of-the-mill electronic traders. If being a commodity trader was easy then everyone with a pencil would be doing it and they'd all be millionaires.

How would you position yourself BEFORE the news is disseminated in order to profit? Buying options doesn't usually work because once the news comes out, even if it's very different that what is expected, the implied volatiliyt component of the options will drop so much that the position doesn't make money. As an example, look at treasury option prices on the day unemployment comes out (first Friday of every month). Even if treasuries are higher, call options will be lower in price due to the fall in option volatility.

Answer 2

Oh Boy is right that there are no unofficial announcements.

However, there are expectations. The market will move rates in expectation of what the Fed will announce. If there is general agreement beforehand on what they will do and no surprises, then the Fed announcement does not affect yields. But if there is disagreement over what the fed will do, the announcement will have an affect -- as those who were wrong adjust their beliefs to match reality.

There is another phenomenon that is going on. Everyone talks about it like it is the Fed making the decisions -- but the Market doesn't have to go along. They can make rates go where they want. If, for example, the market wants the Fed to raise rates more -- their reaction to no action by the fed may be to raise rates on their own.

Answer 3

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