High Impact Events Trading... Gold & Copper

Ignore what I wrote earlier about Fed Funds Futures probabilities; Apparently the spike in repo rates screwed up the CME's calculations. BBG still showing 100% chance of FFR cut tomorrow.

Yeah, i didn't expect to write a FOMC preview... however i have a surprise for you today...

I have been writing the FOMC preview bit by bit for a while now... every night when i'd get back to my boat or the hotel i'd write a few lines, adding something that i've concluded that day... I've just got a few finishing touches and then i'll be done... then i'll be back to enjoying my vacation

FOMC MEETING - 18.9.2019.

Part I - Introduction:

Coming off the first rate cut in a decade, the Federal Reserve Open Markets Committee (FOMC) heads into its September meeting with financial markets not so much considering whether it will cut rates again, but rather by how much and what it will provide in the way of forward guidance. At a speech in Zurich, Switzerland on September 6, Fed Chairman Jerome Powell did little to disabuse financial markets of the widespread expectation of another rate cut in September. Chair Powell enjoys having the last word, as we have now entered the blackout period, the time in the lead-up to the FOMC meeting during which Fed officials refrain from commenting on monetary policy. In my view, the most likely outcome for today's meeting is that the FOMC will cut the fed funds rate another 25 bps, while continuing to emphasize risks to the outlook from global growth and trade policy and acknowledging that inflation remains below target. All told, the meeting should keep the door open for additional easing over the next few months. As i've said in my previous preview for july , I handicap various potential outcomes for the September 18 FOMC meeting in this report.


With less room to cut rates in this cycle than it has had in the past—the Fed would have 225 bps of “ammunition” if it took rates all the way back to 0%—the Fed must be judicious even to the point of sparring about each rate cut in this cycle (Figure 1).
Figure 1:

Overall, the labor market remains tight, as evidenced by the unemployment rate remaining near multi-decade lows. Inflation has picked up recently, with the core PCE deflator up at a 2.2% annualized clip over the past three months (Figure 2).
Figure 2:


However, strictly speaking, at 1.6% year-over-year, the core PCE deflator remains below the Fed’s 2% target, so the FOMC has cover to ease on that basis alone.


But there are a number of factors affecting the economic outlook that could threaten the Fed’s dual mandate (full employment and stable prices) in the future. For starters, the marked slowdown in U.S. export growth in recent quarters, due to Chinese tariff retaliation and generalized deceleration in global economic activity, could remain a headwind to U.S. economic growth. Trade policy uncertainty is also putting business plans on hold and leading to outright declines in manufacturing. This is most prominent in the ISM manufacturing index, which slipped into contraction territory in August for the first time since 2016.

U.S. households remain in good shape with low debt service, a high saving rate and spending on track for another solid outturn in Q3. But there are signs the trade war is beginning to weigh on consumer sentiment as well. One in three consumers surveyed by the University of Michigan spontaneously mentioned the trade war and tariffs in August as that measure of consumer sentiment fell to its lowest since just before the 2016 election.

With low inflation as a workable justification and with trade-related risks having intensified over the past month and a half, another rate cut in September looks like all but a done deal at this point. Markets are currently pricing in a 100% probability that the FOMC will reduce the fed funds rate next week. For all these reasons, it is arguably less important what the Fed does in September and more important what it will offer in terms of forward guidance, which is our focus in the various scenarios we consider in this report.

Introduction conclusion: With low inflation and trade related risks, a rate cut looks like all but a done deal.

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Part II - Possible Scenarios

Scenario 1: Straight Down the Fairway
Key points:
- Fed funds rate: 25 bps cut
- Language: Dovish–Downside risks from trade have increased; maintains pledge to sustain the expansion
- Dots: A sizeable number of dots shift down to 1.63% at end of 2019
- Probability: 60%

Detailed review:
The most likely outcome of the FOMC’s upcoming meeting in my view will be another 25 bps cut, with a sizeable number of committee members keeping the door open to further easing. Little has changed in the economic environment, which makes this reprise of the July meeting our base case. Growth still looks to be moderating slightly, with consumer spending solid but investment weakening. Inflation also remains disappointingly low; the core PCE deflator is up 1.6% year-over-year and inflation expectations hover near historic lows.

More significantly, the risks to the U.S. economy from slowing global growth and trade policy have intensified since the last Fed meeting. Although trade talks look to be back on track beginning in October, the direct costs of the trade war are set to nearly double after August’s events, and with it related uncertainty (Figures 3 and 4).

Figure 3:

Figure 4:

In this scenario, not only will the FOMC cut rates, but it will maintain its pledge “to act as appropriate to sustain the expansion.” In addition, a sizeable number of dots will shift down to 1.63% at the end of 2019. In the last Summary of Economic Projections (SEP), released at the conclusion of the June 19 FOMC meeting, 7 of the 17 FOMC members saw the fed funds rate ending the year at 1.88%. There were no dots below 1.88%. If, as we expect, the FOMC delivers another 25 bps rate cut on September 18, then the mid-point of the target range for the fed funds rate will indeed stand at 1.88%. Although it may be a stretch to expect that 9 FOMC members (i.e., the median voter) will shift their dot down another 25 bps, we think that a sizeable number, maybe 6 or 7, will shift down to 1.63% by the end of 2019. Such a shift would suggest that another 25 bps rate cut by the end of the year is a real possibility.

Summary: 25 bps cut and the door stays open for more easing.


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Scenario 2: The Wasted Bullet
Key points:
- Fed funds rate: 25 bps cut
- Language: Neutral to Hawkish–Pledge to monitor risks to the outlook
- Dots: Most dots remain at 1.88% at the end of 2019
- Probability: 25%

Detailed review:
While Chair Powell and many of his colleagues have done little to push back on market expectations of a September rate cut, hints about what is likely to come after September have remained notably absent in recent public comments. The unpredictability of current trade policy makes it particularly hard to look into the future, leading to the possibility of the FOMC limiting its forward guidance at this time in an effort to keep its options open.

In this relatively more hawkish scenario, the FOMC would cut the fed funds rate another 25 bps, but would be hesitant to signal subsequent moves. After all, overall economic activity remains in good shape. Slowing in the manufacturing sector has been offset by continued strength in consumer spending and in the service sector, while unemployment remains low. Trade talks appear to be back on, even if the situation did intensify in August. Furthermore, after cutting rates 50 bps since July, the committee would be willing to take its time to see how conditions unfold in light of the recent accommodation. The committee would pledge to closely monitor risks to the outlook stemming from global developments and financial instability, highlighting a number of members’ concerns that there are potential costs to cutting rates now.

The clearest signal that the FOMC is hesitant to add further accommodation in the near term, however, would come from the dot plot (Figure 5). In this scenario, one or two dots could shift lower to 1.63%, but the vast majority of dots would remain at 1.88%, indicating that most committee members currently believe that further easing is not needed between now and the end of the year. Furthermore, if Chair Powell indicates in his post-meeting press conference that the rate cut is part of a “mid-cycle adjustment,” as he did after the July 31 meeting, then market participants would also infer that the FOMC is not prepared to do much more this year.

Figure 5:

This more neutral stance on future policy would dull the impact of the meeting’s rate cut. Financial conditions, illustrated in Figure 6, would be even tighter now if not for market expectations of roughly 25 bps of additional easing this year beyond September. Quelling those expectations would likely lead to tighter financial conditions in the wake of next week’s meeting. I would expect the FOMC to be more mindful of such a risk after prior meetings where financial conditions tightened after it was perceived to have done too little. Not only would this tightening in financial market conditions fuel the need for additional easing in subsequent meetings, but the committee would have wasted one of its few bullets.

Figure 6:

Summary: 25 bps cut but limits forward guidance.


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Scenario 3: No Time Like the Present
Key points:
- Fed funds rate: 50 bps cut
- Language: Dovish–Will act as appropriate to maintain expansion, emphasis on obtaining 2% inflation target
- Dots: Most dots at 1.63%, but some dots fall to 1.38% at end of 2019
- Probability: 15%

Detailed review:
It may not be Halloween yet, but yield curve inversions, flaring trade tensions and a more definitive slowdown in the manufacturing sector could very well be spooking some members of the FOMC at present (Figure 7). A 50 bps cut in September is therefore within the realm of possibility. The lag between policy implementation and its effects on the economy suggest there is no time like the present to add accommodation if officials feel it could be warranted in the coming months. With limited traditional ammunition in its arsenal, research suggests more potency to easing sooner rather than later.

Figure 7:

Currently yields all the way out to 30 years on the Treasury curve are below the fed funds rate (Figure 8), a new development since the July meeting. Although Fed officials have highlighted a number of potentially benign reasons for a flatter yield curve this cycle, such as quantitative easing, a number of committee members acknowledge it is still signaling significant risks to the outlook. A larger-than-expected cut in September would help steepen the yield curve, and reduce the chance that such a widely watched indicator contributes to investors “talking” the economy into recession. Financial conditions would ease more generally as well, supporting credit growth and the economy.

Figure 8:


Time is also ticking on the Fed reaching its 2% inflation target on a sustained basis. With recession risks rising in recent months and core inflation still struggling to meet 2%, a 50 bps cut would signal the FOMC is serious about meeting its inflation target before the next downturn strikes and inflation expectations potentially fall further. With such urgency to move, a 50 bps cut may possibly not be the last of easing this year. Although most dots would fall to 1.63%, which would be the new mid-point of the target range for the fed funds rate, some dots could fall to 1.38%, indicating that these FOMC members see the need for further easing later this year.

A 50 bps cut, however, is still an outside chance in my view. With a number of FOMC members publically indicating reluctance to ease at all, getting a super majority of voters on board with such a bold move could be a very tall order.A 50 bps cut also risks being interpreted as a sign that the economy is in a more precarious position than it is. Historically, the FOMC has only cut 50 bps when the economy was more clearly on the brink of recession or struggling to emerge from one. Moreover, with the labor market still the tightest it has been in decades and inflation firming more recently, a 50 bps cut could be construed as the FOMC caving to political pressure, fueling scrutiny over its role as a politically independent institution.

Summary:50 bps cut would signal the FOMC is serious about meeting its inflation target.

Post Event Commentary - FOMC meeting

As widely expected, the Federal Open Market Committee (FOMC) reduced its target range for the fed funds rate 25 bps at its policy meeting today (top chart). Moreover, the statement that was released at the conclusion of the meeting was little changed relative to the statement that followed the July 31 FOMC meeting. Specifically, the language characterizing the current state of the economy was generally upbeat, and it stated that “sustained expansion of economic activity” is likely. However, the FOMC noted that “uncertainties about this outlook remain.”

I see some indications in the statement and projection materials that the FOMC is prepared to ease further, if appropriate, in coming months. For starters, the committee noted again that it “will act as appropriate to sustain the expansion.” Furthermore, St. Louis Fed President Bullard dissented in today’s decision because he would have preferred a 50 bps rate cut. (As they did in July, however, the presidents of the Boston and Kansas City Federal Reserve Banks dissented because they thought that no easing was appropriate at this time.)

More importantly, the dots in the so-called “dot plot” shifted down relative to June, the last time the committee released its projection materials. (The dot plot shows the anonymous expectations of each committee member regarding the appropriate level of the fed funds rate in the future.) Some of the downward shift in the dot plot reflects the 50 bps of rate cuts that the FOMC has implemented since June. But the dots for 7 of the 17 committee members have shifted down to 1.625% at the end of 2019. Because the mid-point of the current target range is 1.875%, these lower dots indicate that a significant number of committee members, albeit not a majority, favor further easing this year. Moreover, 8 of the 17 dots at the end of 2020 stand at 1.625%.

The committee also reduced the rate that it pays on the excess reserves that banks hold at the Fed (the so-called “IOER”) 30 bps, the Fed has had some difficulty controlling short-term interest rates (repo rate surge),the cut in the IOER should help move the fed funds rate back into the target range.

Looking forward, I expect that the FOMC will cut its target range 25 bps in the fourth quarter of this year and another 25 bps in Q1-2020. Although I look for the expansion to continue , I acknowledge, as the FOMC noted in its statement, that uncertainties raised by the trade war cloud the outlook. That said, these expected rate cuts are by no means assured. As the Boston and Kansas City Fed dissents indicate, there are some committee members who are not prepared to ease further at this time. The FOMC will continue to digest incoming data as it contemplates the future course of monetary policy.

Not long ago I really examined how the Fed Funds Rate actually works with respect to the IOER. I was in disbelief when I learned that the Fed Funds Rate, a market based rate, could actually spike just as banks need the funds. In fact, that's the most likely outcome! There's a major design flaw with this and it needs to be fixed before the next liquidity crisis.

The analysis you posted was very good Vorenzd, but it was not written by you. It was written by an analyst at Wells Fargo bank as part of a special report they published on Sep 10. This means that you are a liar, a cheater, and possibly a scammer. It is very bad form to post other people's analysis word for word without acknowledging the person or institution that wrote it. And even worse to claim that it is your own work.

Please be careful about Vorenzd everyone. He is not what he seems.

Hello NorthTrader,

You are completely right.

Some of my other posts also had copied parts, however most are original - especially the comments and responses to other users. However this does not justify what I have done and I'd like to apologize.

Once again, I'd like to thank you for bringing this up and to my attention, no hard feelings at all. You were right, I was wrong.

Good luck with everything.

He's always posted his own opinions. His contributions are very valuable and he'd be a huge loss to this thread. He's helped a lot of us out and always did so just for that reason... to try to help out other traders. Never has had an agenda. Perhaps he should have included his source on this one, but knowing what he's posted in the past and personal conversations I've had, I can't say enough about his intentions and where they've always been. We are just here to help, teach, learn, and contribute. I hope it stays that way. He's been invaluable to this thread and understanding risk ahead of these events.

Let's get back on track. Next week's US GDP in focus.

Yes, after private conversations with Vorenzd and some of his appreciators, I can say without much doubt that he is not a scammer, but a useful and helpful contributor to this forum. His only mistake was plagiarizing other people's work. So let's forgive him and move on. Sorry I was harsh. My scammer antenna is still pretty sensitive after some bad experiences on FF in the past!

Was anyone else surprised by existing home sales today? It's not a big market mover, but it's telling an interesting story.



I've been convinced the housing market topped in 2017. Today's data makes me question that assumption. If we continue to see improving data and lower mortgage rates we might have another leg up in housing. Housing drives the better part of the economy so a resumption of the uptrend would be huge.

Hey, I would love to play with your antenna!

Swing twist it a little bit?

Shall we play Hide and Seek?

Or maybe Catch Me, if You Can?

On top of lower mortage rate and the economy improving, i believe there is another factor that's contributing to the housing market, a factor that many ignore and classify as non economic, but i'd say it still has an influence.

In my opinion it has a lot to do with the short lasted birth rate increase that happened around 30 years ago.

The average american buys their first home when they turn 30 years old
Here is the number of newborn children , a possible indicator of moves in the housing market:


However the number of born children is not necessarily a good indicator of the housing market, as we have to take into consideration the mortality rate as well.

Here's a chart showing the US birth rate :

Source for chart : National Center for Health and Statistics.


We need to compare the birth rate from 30 years ago to the mortality rate today to get the best results for our calculations... and according to my calculations
we will continue to see an increase in the housing market until 2021, after that I believe we will see a decline. (provided mortality rate stays nearly the same as today)


But you know what's most interesting... this housing market top that I'm predicting falls right together with what many predict as the year when US equities no longer hold... perhaps the housing market will be the catalyst to a financial crisis in 2021.

Great insights and food for thought. Nice example of long-range analysis. Let's keep the big picture in focus. Thanks Vorenzd!

The impact of demographics on the economy has always been opaque to me. I've seen some charts that seem to show demographics playing a major role in inflation rates, but after really scrutinizing the data I thought the relationship was inconclusive. At some level I'm sure demographics do play a role in the economy, but it's just not clear to how and to what degree. Unfortunately there hasn't been much written on this subject.

As someone who owns real estate, I certainly hope prices go parabolic! If housing peaks in 2021 though, I'd expect equities to continue to go up quite awhile longer. A peak in housing should coincide with a 1-2y lead time on equities so we might be looking at a 2023 equity top if housing does keep going higher from here. Interestingly, housing leads interest rates too so if the housing market hasn't peak it suggests bond yields haven't peaked either. That would make for a pretty epic short opportunity in bonds!

As it stands, I'm still pretty confident housing peaked and since then we've seen bonds yields peak and come down. Yield curve inverted, employment appears to have peaked, vix is trending up, etc etc. A lot of factors I'm seeing point to this business cycle coming to an end in the next 6 months. As I mentioned earlier, I don't think the S&P has peaked yet and I'm still very long. I'm going to take a second look this weekend though, I've got a big QQQ position I might liquidate. I bought it as a beta play rather than simply being long the S&P, but I'm not sure it will be a reliable bet going into the last leg of the bull market. If I sell it I'll probably just buy GSY or JPST while we're in this transition period.

The Pentagon will deploy US forces to the Middle East on the heels of the Iranian attack on Saudi Arabian oil facilities

Yeah, unfortunately there are no high quality papers that give a conclusive answer to this question, I'm doing some research on that subject and i've found some interesting correlations, including a correlation with the housing market. Note that this research was done based on European data, but the same should stand for US.

I only found correlation between demographics and parts of the economy for which the quantity of "available people" matters. Like existing home sales for example. There are many flaws in this (Maybe the people who sold their house moved away to a new home, instead of dying or leaving the country), so it is all very vague, but it's interesting to see and compare... and maybe stumble upon something that can be of use.


If we're speaking about Europe, housing is higher then ever, it is possibly peaking right now. Prices are skyrocketing and sales are crazy in most member countries. Most of this has to attribute to the tourism craze that hit this part of the world, and that's why I tend to believe that the equities and housing might crash at the same time - you see, most "housing" are apartments, that are registered as private homes but are rented 90% of the time, so this is a possible European scenario:

Equities fall / business fail -> we enter a financial crysis -> less people travel -> tourism suffers -> people can't pay their mortage for the apartment -> housing collapses.

In Europe housing has had a close tie to the birth rate for hundreds of years. That started changing in 2015.

If you bought an apartment in Split or Dubrovnik in Croatia in 2005, right now you would have around 500% return on your investment (Inflation included)... and still rising. Same goes for Portugal and many other EU countries.

That's why i believe we're far from the peak. I'm from Europe so i focus mostly on European data, but history shows that both US data and EU data don't stray too much.


As for S&P... i've exited my longs, I saw too much risk ahead. However I stayed long on many US companies that I still believe have potential to rise... and ofcourse.. shorted Apple after the Iphone launch (risky, but paid of last 2 years).

I do believe S&P has not peaked yet, but I just can't justify going long with everything that's going on right now, it's not to my taste.

That sounds plausible, but I think it would be an atypical sequence of events. Usually equities falling doesn't hurt housing too much. In fact, the tech bust proved to be a tailwind for housing when the fed lowered rates to support the economy. Likewise, the crash of Oct 1987 didn't impact housing.

Wow, I didn't realize the prices in Croatia were up so much since 2005.

I keep hearing good things about Croatia. My wife has been asking me to go so I'm probably going to take a trip there once my son is old enough to travel. Maybe the bubble will burst by then and I can pick up a nice vacation home at a discount.

I definetly agree that it would be a very atypical sequence of events, but then again, there is nothing typical about the housing market in Europe at the moment, we've never had a housing market that depends on tourism so much... and when a crash comes - tourism goes down with it. This bond between tourism and the housing market has become too strong and has made the housing market more volatile, just like tourism is. (talking about Europe)


Yeah.. in Croatia the average home price for a 75m2 apartment (or around 800 square feet) in a city is around 200,000$. The average salary is 867$ /mo, the minumum salary is only 400$ monthly. Think about that... people can't really afford their own apartment + mortage rates are very high. This means that the average Croatian will likely never own his own apartment unless they inherit it or have a better paying job. So most people rent. There are only 3.5 million people in Croatia. (there were 4.5mil 7 years ago, everyone is moving away to other EU countries)
Tourism is literally the only thing driving prices up.Imagine if tourism failed in such a market, the prices would go "Lehman mode" in a night.

Croatia is a very extreme example, it's not to that extent in the rest of Europe. But the Croatian real estate market will fall significantly once the crisis hits... so yeah, you might be able to get a really nice vacation home!

Beautiful place to visit also. If you do decide to travel here, let me know and I'll make sure to arrange something special for you and your family.

The nature here is lovely though, if you have money Croatia is probably one of my top choices to live at. Best combo in my opinion: Switzerland at winter, Croatia at summer.

US GDP - September Preview

1. Final GDP q/q

Forecasts

1. Of the 76 economists polled by Reuters, 54 are predicting 2.0% for the final Q2 GDP figure. Most others are calling for 2.1%. The range of estimates fall between 1.9% and 2.3%.
2. Of the 62 economists surveyed by Bloomberg, most are predicting the same, 2.0%. The low/high forecasts are 1.9%/2.2%.
3. The aggregates of these forecasts is hinting at a possible better than expected number.

Notes

1. Final GDP data hasn't had much impact on gold in a long time.
2. For gold to be impacted we'd have to see a significant deviation from forecasts. Given this is Final GDP, that's highly unlikely.
3. Advance GDP has been the only GDP data that's consistently had significant impact on gold and precious metals.
4. The last time Final GDP had a large impact on gold was in Sept 2018, when the 4.2% figure was confirmed. There was also other data at the time that played a part in impacting markets.

Recent GDP impact (Advance vs Prelim vs Final)

Displayed below are charts of Gold, and the US dollar vs the euro and the yen at release time.

Advance GDP (July)

Prelim GDP (August)

Final GDP (June)

Summary

I don't recommend trying to trade this data. Based on recent history, Final GDP doesn't have much impact. Final GDP is last of the three and by the time it's released, the market has generally priced in the corresponding quarter of US economic growth.

Durable Goods • Friday 27.9.2018.

Event preview:

Durable goods have rose for 2 months straight, with the July rise being 2.0%.

I'm expecting a sharp decrease in durable good orders on Friday.

The 737 MAX-8 aircraft has still not been cleared for flight, even though Boeing is doing all they can do get it back in the air. Reports suggest that there have been only 6 orders for this type of aircraft in all of August, this guarantees that the headline number will fall. It is inevitable.

Durable goods are not a good indicator of buisness spending due to volatile assets, we need to cut out the defense spending and volatile assets in order to get a better indicator - that's why we turn to Core Durable Goods.

The ISM manufacturing figure has slipped quite a bit in August and that is signaling that there might be trouble even for Core Durable Good orders.

I expect both the headline number and the core number to decline.


Previous: 2.0%

Personal opinion: -1.7%

Consensus: -1.2%




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EDUCATION:

I have decided to make my previews more begginer friendly and also have decided to include all the sites from which i have gathered my data. This can perhaps help some of you write your own reviews and post them in this thread in the future!


Data sources:
Free: U.S. Department of Commerce, ISM
Paid: Wells Fargo Research, Bloomberg, Goldman Sachs Research

Definitions & info :

1.What are durable goods orders?
Durable goods are the government’s classification for long lived retail goods

2. The boeing 737 MAX-8 was banned from flying after 2 such aircraft crashed due to a fatal design flaw that boeing tried to fix with software.

3. The ISM manufacturing index indiciates the ammount of goods manufactured - notice the connection - more manufactured goods = more orders.

4. Durable goods are very volatile, they often swing back and forth from negative into positive territory.