High Impact Events Trading... Gold & Copper

US Retail Sales - September Preview

1. Core Retail Sales m/m
2. Retail Sales m/m

Forecasts

1. Core Retail Sales
   - Core Retail Sales m/m is expected at 0.1% vs 1.0% prior
   - In Bloomberg's survey of 65 economists, the average forecast is 0.1%. Majority of forecasts fall in a range between 0.0% and 0.3%.
   - The two most recent forecasts submitted to Bloomberg today are -0.1% and -0.3%. Another late -0.3% forecast was submitted yesterday.
   - These late forecasts could be signaling a weaker than expected number. I've posted about forecast weights here.
   - Moody's Analytics is forecasting -0.1% for Core Retail Sales.
   - Reuters polled 55 forecasters. 0.1% is the avg estimate. Notably, 33% of forecasts are at 0.0% while just 24% are at 0.1%.
2. Retail Sales
   - Reuters polled 61 forecasters. 0.2% is the avg estimate. Again worth noting, 33% vs 25% are split between 0.1% and 0.2% respectively.
   - In a survey of 73 economists by Bloomberg, the avg fell at 0.18%. Majority of forecasts fall in a range between 0.1% and 0.3%.
   - Late arriving forecasts are showing lower estimates here as well.

Notes

1. Another solid report will signal to the Fed that consumer spending is holding up, and that the economy is not in much need of policy accommodation
2. A big miss would raise concerns about slowing growth and trade uncertainties impacting consumers, and could add urgency for policy easing
3. Be careful with revisions to prior data and whipsaws.

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

More chart impacts in this preview report

August

Final Thoughts

The risk is in any big surprises in the data that could trigger risk sentiment, especially on a Friday with not much else on the docket. Without any significant deviation from forecast in either number, impact will be limited. While worth monitoring, I don't expect to see any big surprises tomorrow. I recommend at least watching just in case. Otherwise, I'd sit this one out.

As always, caution is advised. Good luck fellow traders!

Agreed! Great analysis! Thanks.

Now I'm starting to understand the conundrum that the ECB is facing. They're basically out of monetary policy tools? Fortunately for Draghi this is soon going to become Christine Lagarde's problem to deal with. Thanks for dropping this knowledge on us. Good stuff!

Thanks buddy, likewise!!!

I'll let you know when I get out. I delevered back in May and will probably exit completely in Q4, but I'll hold until the data turns.

Long read, but if you're interested this guy does something very similar to what I'm doing. I use different indicators, but it's the same concept: http://www.philosophicaleconomics.com/2016/02/uetrend/

I just gotta say ya'll dropping some jewels up in here and good lookin out!

Too bad I'm not up for some of these big dawg events, but keep it up ya'll!

In other news, how bout that copper!? Fundamently is it just, if world economic numbers are looking good, copper rises?

Exactly, ECB is running out of tools, and it feels as if they wasted them on this meeting. With inflation subdued,growth stalling and negative interest rates becoming standard, the question arises whether the Eurozone is turning into Japan? This is the fear of many investors, myself included.

Great ECB preview by the way... retail sales as well, you've really set a high standard.



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That was a great to read. Thanks for sharing!

mannnn gold definitely got rocked this morning! great event!

Post Event Commentary - Retail Sales & Core Retail Sales


Headlights Pointed at the Dawn
Retail sales increased 0.4% in August, which was double the 0.2% increase that had been expected. The headline beat was largely a function of a 1.8% increase at motor vehicle & parts dealers, where vehicles were moving off the lots faster than they have since March.

Sales across all other retailers, ex-autos, were unchanged, though there was plenty of variability in individual categories that offers clues as to how consumers are faring in the context of the ongoing trade war.

Clothing, furniture and general merchandise stores all stand out as places where goods could be impacted by tariffs, and all three saw sales decline in August. The “control group” of retail sales, which excludes a number of volatile categories and serves as a proxy for consumer spending in the GDP report, increased 0.3% in August; the increase in the prior month was revised lower.


Today is the Greatest…Day I’ve Ever Known
At a time when recession risk dominates most economic discussions, the strength of the U.S. consumer is among the more compelling examples of an economy that is still firing on all cylinders. Setting aside for now the fact that consumer spending can be among the last categories to contract in a downturn, the strength here is undeniable. Real personal consumption (PCE) came in at a blistering 4.7% pace in the second quarter, and with a couple of months of data for the current quarter, it is now becoming increasingly apparent there is upside risk to our forecast of 2.9% PCE growth in Q3.

One puzzling development for which I have no handy explanation is the substantial revisions to online spending. In the inimitable parlance of the Department of Commerce, online spending is simply referred to as “nonstore retailers,” and a 2.8% monthly surge in July was revised sharply lower to a gain of just 1.7%. In August, online spending was up another 1.6%. My best guess here is that Amazon Prime Day and the associated special offers at other retailers with it is creating some increased activity and with it perhaps some reporting lags.


We Don’t Even Care, as Restless as We Are
The factors that typically impact consumer spending are things like how much consumers are making, how the stock market is doing (because bull markets tend to boost the wealth effect) and how consumers feel about things going forward. The still-healthy job market is keeping incomes steadily rising, and the stock market, while choppy, is grinding higher. Some measures of confidence remain near cycle highs, but other measures are starting to slip. The University of Michigan’s survey of consumer sentiment saw steep declines in August with the expectations component falling sharply. The preliminary September result edged higher, but August was revised lower.

Here's the impact Retail Sales had last Friday:

This is very surprising. The CME FedWatch Tool is showing the probabilities of a rate cut this week have come down tremendously. Does anybody out there think the Fed isn't going to cut rates?

1. A month ago, there was a 0% chance of the Fed not cutting in the Sept meeting
2. A week ago, there was a 95% chance of the Fed cutting rates by 25 basis points
3. Yesterday, there was almost an 80% probability that the Fed makes the quarter point rate cut.
4. Today, it's come all the way down to 65% that the Fed will cut rates.

I think the Oil choc is the reason for this drop.
Oil is expected to go up to even $80 which impacts inflation (above 2%). USA will probably take advantage of this hole in oil supply.
Take it with grain of salt!

Good point. It's definitely having an impact. The Fed went into the blackout period thinking they had the markets aligned on the next move.

FOMC Meeting - September Preview

1. FOMC Economic Projections
2. FOMC Statement
3. Federal Funds Rate
4. FOMC Press Conference

Rate expectations

Subject to change prior to event. You can check it here: CME FedWatch Tool. The probability is currently 51.9% in favor of the Fed cutting rates by 25 basis points.

Forecasts

1. Bloomberg surveyed 100 economists. 95 of them are predicting the 25bp cut. Five economists are calling for the Fed to hold rates steady.
2. Reuters polled 120. 110 are predicting the 25bp cut. Ten are calling for unchanged.

Notes

It's been a very long time since there's been this much uncertainty heading into a Fed meeting in terms of the direction of interest rates. July's meeting there was uncertainty about how deep the rate cut would be. Since the beginning of the blackout period on Sept. 7th, uncertainty has increased drastically. Inflation pressures caused by a 14% rise in oil prices is the main reason behind the change.

If inflation isn't as much of a concern, the questions surrounding a rate cut is that the data doesn't support it. Although manufacturing is weakening, it only accounts for around 10% of the US economy. The service sector, which is much larger, has been performing well. With unemployment below its natural rate and inflation expected to rise, the Fed could argue they are in line and meeting its dual mandate.

With that said, the Fed does not have a history of surprises and will likely deliver what was signaled prior to the blackout period, a 25bp rate cut. Since the case is weak, with a divided Fed, the rate cut could be delivered with a hawkish tone.

Fed Funds Rate

The market is expecting the Fed to deliver a 25 basis point cut. If the Fed doesn't cut rates by 0.25% and leaves them where they are, the USD will likely rally as gold falls.

Fed Statement

No major changes in language are expected from June's statement when the Fed said they will 'act as appropriate' to sustain the expansion. The Fed usually attempts to keep the rate statement from any surprises, unless their intention is to change market expectations about the path of future rates. If the Fed leaves rates on hold, expect more drastic changes in the statement.

Economic Projections

There will be a drastic change in this report. In addition to the latest projections on GDP growth, unemployment, and inflation, we will also see the Fed's new dot plot, which will tell us where members see interest rates by end of year 2019 thru 2021. Last time the Fed released the dot plot was in June, prior the the July rate cut. At that time, the Fed indicated no rate movement by the end of 2019, one rate cut in 2020, and a rate hike in 2021. Major changes can certainly trigger market moves. The most likely scenario involves two further rate cuts by the end of the year, to a target range of 1.50%-1.75%. If the dot plot deviates from that, expect the markets to be impacted.

FOMC Press Conference

Powell will have to justify (assuming a rate cut) why the Fed is lowering rates amid an improving economy and stock market indexes near record highs. Most of the drama could be in this press conference. Unlike his predecessors, Powell has a history of saying things that surprise the markets. Last October he triggered some market turbulence when he said, amid a series of rate increases, the Fed was 'a long way' from neutral rate, indicating more hikes were coming. Then in December, he said the Fed's balance sheet reduction program was on autopilot. Yet again, last meeting he caught markets off-guard when he called the rate cut part of the 'mid-cycle adjustment.' While it's not his strategy, Powell is earning a reputation for putting his foot in his mouth during post-meeting pressers. To us traders, it means be ready for the volatility he will provide.

Recent Impacts (Gold, EUR/USD, USD/JPY) (see June and July previews for more historical impacts)

The arrow is pointing to the beginning of the press conference.

May

June

July

What to expect

Volatility. Then, more volatility.

The uncertainty surrounding the rate cut is going to cause the markets to initially react in a knee-jerk fashion. After that the rate statement and the economic projections will need to be digested, and this is what's going to give the markets direction. If the Fed delivers a rate cut as expected, the market reaction will come down to whether the Fed is perceived as dovish or hawkish in the statement and projections. A dovish sentiment will support gold prices and send the USD lower, and a hawkish tone will push USD prices higher while gold sells. When Powell takes the mic, if history is any indicator, there's a good chance he'll either push markets more in the same direction or we'll see a dramatic reversal.

As always, caution is advised. Good luck traders!

Brilliant notes. Thank you!

thanks Mahn! really looking forward to it

Excellent!!! No chart for gold?

Yes. of course. Gold is symbol GC. It's the CME front month contract (futures). It's the top one.

The updated rate probabilities via the CME FedWatch tool are bringing the odds of a cut to about 50%. Very surprising. It's setting up to be an even more volatile reaction than previously anticipated. (Updated preview)

Locked and loaded...

An interesting read:
https://www.fxstreet.com/analysis/ca...n-201909160104

Vorenzd unfortunately is traveling and will unlikely be able to chime in here. His input is always insightful and helpful.

Unitedgold, where you at? You ready?

Any additional thoughts, feedback, input, etc is always helpful to us all and greatly appreciated!

Good luck GasFx! Just some thoughts as we head into the big day.

Longer term gold prices are still supported.

1. China moving down to a more sustainable growth rate.
2. Deleveraging, a weak financial sector and trade wars are dampening Chinese activity.
3. Germany may be in recession. Brexit drama isn't going anywhere anytime soon and further undermines the European economic outlook.
4. Italy lurks as a bigger than realized potential risk.
5. Japanese growth, already very modest, will likely be hit in coming quarters with a consumption tax increase.
6. Iran tensions.

That's not the extent of that list either. There's way too much global uncertainty for gold to depreciate over the long term. However, if the US dollar rallies, gold's inverse relationship will be on full display as it heads lower. If the opposite occurs and the US dollar drops, I see gold as having significantly more upside potential.

Thank you sir! I've bookmarked it for later reading.