High Impact Events Trading... Gold & Copper

Nice write-up champ!

What a rational decision data driven approach!!! Well response to recent Donald Trump ’s comment on strong USD. Markets have responded accordingly. If this Friday number are positive gold may plunge.

Hi Ben, good to see you back. I hope to have a preview up soon on NFP and the jobs data due out Friday. About gold, it's tough to say that it could plunge given how much support it's getting from all the global uncertainty in the world. You're correct, it'll decline on rising USD prices, but I tend to think that on these USD-related gold drops, we could see some rather quick recoveries in gold prices.

Impressive write up! Thanks for the insights. Appreciated EventsTrader's analysis as well. You guys make it seriously helpful to be in this thread.

US Employment Data - August Preview

1. Average Hourly Earnings m/m
2. Non-Farm Employment Change
3. Unemployment Rate

Notes:

1. All three releases have the potential to have significant impact.
2. NFP is most likely to deviate from forecasts, making it the most common trigger for market moves at release time.
3. Average Hourly Earnings can also have considerable impact depending on how much the actual deviates from forecast. Sometimes, the most impact of all three.
4. The unemployment rate has lost some of it's luster in recent years although it shouldn't be discounted as a change in the rate that's not forecasted usually has market impact.
5. The forecast for the unemployment rate is 3.6%. Economists are very almost evenly divided between 3.6% and 3.7%. Actually the average forecast is about 3.65%. I wouldn't expect the markets to be impacted much by this data unless we see an actual deviate by 0.2% in either direction. Otherwise, the focus will be on NFP and Avg Hourly Earnings.
6. Most economists surveyed are in line with their forecasts, 0.2%. A deviation from that forecast is likely to have market impact.
7. NFP is forecasted to show a change of 164K vs 224K prior. Most forecasts fall between 145K and 185K. It should be noted that there's a higher risk of a softer outcome for July after last months surprise 224K vs 162K forecast and 72K prior.
8. These shouldn't be taken as anything other than outliers that don't mean much, but the low forecast is 74K and 224K at the highest end.
9. ADP sometimes can provide some insight into what to expect for NFP. Today, we say a stronger than expected reading of 156K vs 102K forecast.
10. After today's FOMC drama, the markets are lowering their rate expectations. Currently over 50% of the markets think we will see one rate cut of 25bp by the October meeting. 25% think the Fed is done cutting rates at least until December.
11. NFP can influence market expectations because it's one of the most important sets of data to the Fed in setting monetary policy. It's a very current and real reflection of the current US economic conditions.
12. Stronger than expected jobs data could extend this week's USD rally and possibly cause some more selling in gold. A stable US economy is not only important domestically, but it also means that the US is in a better position to deal with some of the economic instability in other countries.
13. On the other hand, any weaker than expected figures may send the USD dropping, giving back some of its recent gains. Gold might rally on weaker data as it has quite a bit of ground to make up. A weak US labor market supports the price of gold as there are implications beyond the US borders right now.
14. The ISM and NIFB employment components of the business surveys show companies are hiring workers, or at least want to. Job openings remain close to all time highs, while demand remains strong.
15. Given the demand outweighs the supply in the labor market, there's a good argument that wages could tick up. However, according to the latest Beige Book, businesses have been using incentives and expanding benefit packages as an alternative. Given the data provided in the most recent Beige Book, it doesn't appear that a tick up is likely, but there's a possibility.
16. Last month's tick up in the unemployment rate was attributed to a growing participation rate. Don't forget that 3.6% is the lowest reading since Dec 1969. Anytime the media can print headlines and disseminate information in a manner that makes the data seem more extreme, the market might digest it as such. Although this is unlikely since we've already seen the rate at 3.6% earlier this year.
17. This data is susceptible to revisions to the prior data, which can have impact. Be cautious that revisions are likely to NFP.
18. US labor data can influence the Fed. As preservation of existing growth stated as a driver behind the Fed's policy decisions, the state of the US jobs market will likely be a point of focus for Fed officials. As in most months, this release has the potential for considerable market impact.

Recent Impacts:
Below, is how gold, usd/jpy, and eur/usd have reacted after the three most recent US employment data releases. The impact is consistent and heavy.

July

June


May


Conclusion:
First thing I want to point out is May's impact. It clearly shows that the Average Hourly Earnings data can take center stage. It can have just as much, maybe more impact than the employment figures. August's data is expected to show some continued strength in the US labor market. Any data that shows otherwise, will potentially trigger some significant market moves.

If the data comes in stronger than expected, the USD should rally while gold sells off. On the other hand, weaker than expected data will send the USD lower, and trigger a rise in gold prices. The extent of any rally or selloff will depend entirely on the data and how much it deviates from what the market has already priced in (forecasts).

My best piece of advice is don't get whipsawed! Nobody likes a whipsaw. This data will likely have enough impact where we could see a continuation of price moves. That gives the trader some time to avoid any volatility prior, and minimizes risk as long as a direction is clear and all the data has been released.

I'll be watching closely for opportunities in both directions. The Fed is still in their blackout period, so this data could have some pretty heavy significance as the market remains largely dependent on data to decide what their rate expectations might be.

As always, be cautious and good luck!

As a newbie, what's the best way to avoid this impact? Wait a few secs then hop in? I have been whipsawed in several trades recently. Frustrating!

ISM Manufacturing • Thursday 1.8.2019.

The manufacturing sector continued to struggle in June. The ISM manufacturing index has fallen 3.6 points since March and now stands at 51.7—its lowest level since October 2016.

June production was strong, rising almost three points to 54.1. That said, new orders was down to 50.0, a three and-a half year low, and barely avoided a contractionary print. Joining low prints in backlogs and supplier deliveries, new orders is the latest line item to suggest modest growth. Indeed, Wednesday’s preliminary Markit PMI tumbled another 0.6 points in July, reaching its lowest value since September 2009. U.S.-China trade tensions have stabilized for now, but uncertainty will likely continue to weigh on manufacturing activity in H2-2019.

As a result, I forecast the ISM manufacturing index will rise slightly to 51.9 in July. A Fed rate cut next week may support manufacturing sentiment in the latter half of the year.

Previous: 51.7

Personal opinion: 51.9

Consensus: 52.0

Remain flat until a clear direction emerges. Once there's a clear market sentiment, and some momentum in a clear direction, it'll be like taking candy from a baby.

Nonfarm Payrolls • Friday 2.8.2019.

Last month, nonfarm payrolls increased 224,000, though May hiring was downgraded by 3,000. Transportation & warehousing employment growth has been trending lower as trade-related headwinds affect hiring at home. Meanwhile, domestic-oriented hiring rose; the education & health and professional & business services sectors added 61K and 51K, respectively. That said, retail trade saw its fifth straight month of payroll declines and has decreased by 56.4K since the beginning of the year.

This month also saw an uptick in the unemployment rate to 3.7% due to more participants entering the labor force than getting hired. Initial jobless claims trended lower so far in July, averaging 5.6% lower than June. Consiering the recent escalation in the trade war, I expect a sub two-hundred trend for payrolls for the remainder of 2019 as uncertainty weighs on hiring.

I expect employers added 170,000 net new jobs in July.

Previous: 224K

Personal opinion: 170K

Consensus: 160K

ISM Non-Manufacturing Index • Monday 5.8.2019.

If we are looking for signs of a slowdown in the U.S. economy, we should look no further than the Institute for Supply Management’s purchasing manager indices.

After topping out around 60 in the late summer/early fall of 2018, both the manufacturing and non-manufacturing PMIs have been on a steady downward descent. The manufacturing index has fallen farther than the nonmanufacturing index, a trend that has played out elsewhere around the world of late, especially in Europe. From 2014-2016, a similar dynamic played out, as the U.S. economy as a whole slowed, but the slowdown was particularly concentrated in the manufacturing sector. During that period, a three-month moving average of the ISM non-manufacturing index never got below 53.5.

Today, the non-manufacturing PMI sends a similar signal: economic growth is slowing, but the service sector likely remains strong enough to keep the overall economy afloat.

Previous: 55.1

Personal opinion: 55.3

Consensus: 55.5

NFP and ISM today both caused a smaller reaction than usual in the markets. I'm curious how long this will last, apparently trade is all that matters at the moment.

Today was all about trade and China's devaluation. But it's also about rate cuts, not only from the Fed but from central banks in general. As the sentiment shifts towards a greater likelihood of deeper easing, at a faster pace, gold prices will be seeing some upside potential.

The RBA Rate Indicator is showing some uncertainty in market expectations going into the RBA meeting later on tonight. While this event doesn't have a history of impacting metals much, it might be a good one to keep our eye on.

As of the last posting, we can see the market split 43%/57%, with the majority now expecting a 25 basis point rate cut from the RBA.

Producer Price Index • Friday 9.8.2019.

Like other inflation measures, growth in the producer price index has slowed this year. On a year-over-year basis the PPI for final demand is up just 1.7%, the lowest reading since January 2017. Excluding food and energy, price pressures are a bit more firm, but they have still decelerated since the start of the year.

The “core-core” PPI, which excludes food, energy and trade services (measured in margins), increased 2.1% year-over-year in June, down from a recent high of 3.1% in September 2018.

Tame price pressures in the pipeline are consistent with other readings. For example, the prices-paid component of the ISM manufacturing index was 45.1 in July, the lowest since February 2016... If PPI inflation were to slow further, it would likely reinforce markets’ views that this week’s rate cut by the Fed will not be a one-and-done move.

My forecast is for one more rate cut this year, and for inflation to eventually pick up around the end of the year.

Previous: 0.1%

Personal opinion: 0.1%

Consensus: 0.2%

While this is not what the market is pricing currently in, I expect the same. The market is pricing in a 100% chance of a rate cut in the September meeting. After that, we are both in line with only 11.9% of the market for year-end rate expectations. Most are expecting at least two, maybe three cuts.

Isolated to rate expectations, there's some significant upside risk in the USD if rate expectations are not met. The stock market won't like it either, and that means downside risk to US equities. But those risks don't mean much this far out and ahead of the September meeting.

US CPI - August Preview

1. CPI m/m
2. Core CPI m/m

Forecasts:

1. For the CPI overall, almost all economists are estimated either 0.2% or 0.3%, with more predicting 0.3%.
2. For the CPI core, which excludes food and energy, was much more in line with almost all economists forecasting the same 0.2%.
3. Since the CPI overall average forecast fell almost in the middle of 0.2% and 0.3%, there seems to be some risk in a miss with the CPI overall number.
4. Logic would dictate that a stronger than 0.3% in the CPI overall actual would produce a stronger market reaction with any deviation from forecast, while a weaker than expected number may need to miss by two tenths of a percentage point to produce a significant reaction.
5. A deviation from forecasts in the CPI core number in either direction carries risk, since the market consensus is in agreement with forecasts at 0.2%.

Notes:

1. The market has fully priced in a rate cut for the September FOMC meeting, and is almost pricing in an 63% of another rate cut in October. 15% of the market believe between those two FOMC meetings we'll see rates drop by 75 basis points.
2. The market is pricing in only about a 21% probability that there will only be one rate cut between the two September and October meetings.
3. With market expectations skewed towards an extremely dovish fed, the impact from the inflation figures may be prone to trigger larger than normal market impact on stronger readings as investors weigh higher inflation against future interest rate changes from the Fed.
4. Conversely, weaker than expected inflation could trigger market participants to begin pricing in either deeper rate cuts in September, or increased probabilities of further rate cuts for the October and December meetings.
5. With focus on inflation in terms of it's impact on the Fed's monetary policy settings, these CPI readings could have a larger than normal market impact.
6. This release carries risk in conflicting readings from the overall and core readings, making it susceptible to whipsaws and knee-jerk reactions.

Recent impact on USD/JPY, EUR/USD, and Gold

July

June

May

April


Summary:
Of the last four releases, two clearly triggered significant impact in markets. Gold is likely to be impacted but not to the extent the USD dollar might. The inverse relationship means that Gold will drop as the USD strengthens on a higher than expected inflation reading. On weaker data, Gold will move higher as the USD drops.

There's always the possibility that the numbers are released in line with expectations and we get a big fat dud. So be cautious in trying to trade ahead of this release in anticipation of moves one way or the other. That's risky in that the market is likely to move in either direction depending on the data. It could also whip back and forth if there's conflicting readings in the core and overall number.

The opportunity here is with surprise in inflation, either stronger or weaker. Since both would impact interest rate expectations, we are likely to see a prolonged price movement where an entry can be taken with far less risk than trying to enter at or just before release time.

And remember, you always can just observe and not risk anything at all. Be safe out there!

China Industrial Production - August Preview

1. Industrial Production y/y

Forecast

1. While the consensus forecast is 6.0%, economists' estimates are in a wide range from about 5.4% to 7.0%.
2. More forecasts fall under 6.0% than over.

Notes

1. China's industrial sector accounts for about 40% of the country's GDP.
2. China's accounts for about half of global copper demand.
3. Copper demand is largely dependent on China's growth.
4. Industrial production figures will be watched closely for signs of a slowing economy, as well as impact from the US-China trade dispute.
5. Along with industrial production figures, we'll see other data out of China including retail sales, unemployment rate, and fixes asset investments.

Potential Impact
This data is usually released along with GDP figures, which tends to give it more media attention. GDP has heavier impact across most asset classes, including precious metals. Industrial production however, can have a very large impact on the price of copper. Any deviation from forecast, depending on the extent of it, can trigger volatility in Copper. A stronger than expected number signals demand is healthy and supports copper prices. A weaker than expected figure signals waning demand from the largest copper consumer, which will usually send prices lower.

Today's release may have more impact than normal if there's a big surprise as the market could take it as a sign of the trade tensions between US and China starting to show in the data. The risk is probably a little skewed towards the weaker number, although given copper's recent strength, a positive number carries the potential for moves as well.

The AUD/USD is also expected to be volatile after the data is released. As with copper, the aussie has a positive price correlation and will move higher with stronger data, and drop with weaker than expected data.

Below are examples of the impact this data has had in the past on Copper and the aussie, showing July and April's data. Both came in higher than expected and the prices show the positive correlation between the data and price moves.

July

April

Attached Image (click to enlarge)

Attached Image (click to enlarge)

I'd advise caution. I don't see this having significant impact without a considerable deviation from the 6.0% forecast. The other data being released shouldn't have much impact either, but don't discount the risk on/off implications of all of the data comes in higher or lower than expected. For example, if we see weak data across the board, that may trigger fear that trade tensions are finally having enough impact to flow into safer vehicles. That's unlikely with the upcoming data but not impossible.

I'll be monitoring this event, unlikely to trade it unless the market takes a clear direction. Be safe out there fellow traders!

Retail Sales • Thursday 15.8.2019.

Aside from a decline in February, retail sales have increased every month so far this year. That’s consistent with the elevated confidence data and suggests consumers remain comfortable with their spending habits despite increased risks to the outlook.

Retail sales ended the second quarter on a strong note, as growth was broad based with 11 of the 13 retail categories increasing in June. Sales in the “control group” (excluding autos, gasoline and building materials, and a key gauge of underlying consumer spending) have been exceptionally strong in recent months with the three-month annualized rate at 7.5% in June.

With manufacturing and investment continuing to bear the brunt of an escalated trade war, consumer spending remains the primary driver of U.S. GDP growth. As long as the labor market remains healthy, this positive consumer spending trend should continue.

Previous: 0.4%

Personal opinion: 0.3%

Consensus: 0.3%

Thanks for an excellent review. Will remain alert tomorrow to see how it plays out.

Great point here, and excellent preview. I should have mine up sometime today.