Why Investors Care
U.S. trade with foreign countries holds important clues to economic trends here and abroad. The data can directly impact all the financial markets, but especially the foreign exchange value of the dollar. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States since this trade imbalance creates greater demand for foreign currencies.
The bond market is very sensitive to the risk of importing inflation or deflation. When Asian economies collapsed at the end of 1997, bond and equity investors feared that deflation in these economies would be transported to the United States. While goods inflation did decline modestly and momentarily, service inflation kept on ticking. Thus, the linkage is not so direct.
A chronic current account deficit also suggests that consumers and businesses in the United States are outspending their income. We are living on credit while foreigners are paying for our profligate ways.