U.S. Energy Information Administration Petroleum Status Report

Economic Calendar

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What is the EIA Petroleum Status Report?

The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad.  Inventory levels help us forecast the direction of prices for petroleum products.

Boisseauc 1646
Crude oil is an important global commodity. World map, Boisseau circa 1646

Why is the EIA Petroleum Status Report Important?

The prices of petrol products are determined by supply and quantity demanded – just like most other goods and services.

During periods of strong economic growth, we expect demand to be robust. If inventory supply is low, this will eventually lead to an increase in crude oil pricing.  Or, price increases for a wide variety of petroleum products such as gasoline or heating oil.

  • If inventories are high and rising in an environment of strong demand, prices may remain in equilibrium.
  • In a slow economic environment, demand for crude oil may fall.  And, If inventories are rising, this may push down oil prices.

Crude oil, priced in USD, is an important commodity in the global market. Prices fluctuate depending on global supply and demand conditions. Since oil is such an important part of national economies, it contributes to the direction of inflation.  In the U.S., consumer prices have stabilized whenever oil prices have fallen, but have accelerated when oil prices have risen.

The EIA report will become even more relevant if the Shanghai Futures Exchange (SHFE) subsidiary Shanghai International Energy Exchange (INE), initiates a new oil futures contract denominated in Yuan.

ISM Manufacturing Composite Index

Always Check The Economic Calendar

What Is The Institute For Supply Management (ISM) Manufacturing Composite Index?

The manufacturing composite index from the Institute For Supply Management is a diffusion index.  It is calculated from five sub-components of a monthly survey; there are eleven sub-components in total.  The survey respondents are purchasing managers from roughly 300 manufacturing firms nationwide.

The entire survey asks purchasing managers about:

  • general direction of production
  • new orders
  • order backlogs
  • their own firm’s inventories
  • customer inventories
  • employment
  • supplier deliveries
  • exports & imports
  • prices

The five components of the composite index are:

  • new orders
  • production
  • employment
  • supplier deliveries
  • their own firm’s inventories

Note that the five components are equally weighted. The questions are qualitative (not quantitative, so no specific numbers).  Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

WHY IS THE ISM MANUFACTURING COMPOSITE INDEX IMPORTANT?

The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is solidified by the fact that it is available very early in the month and is not subject to revision  –this lowers the probability of reporting shenanigans.

Investors need to keep their fingers on changes in the economy because it dictates how their investments will perform. Tracking economic data such as ISM manufacturing lets investors know what the economic backdrop is for various markets.

Remember, the stock market likes to see healthy economic growth because that translates to higher corporate profits.  And, the bond market prefers slow growth and is very sensitive to whether the economy is growing too quickly which gives rise to inflationary pressure.

ISM manufacturing data give a detailed look at how busy the manufacturing sector is and where things are headed. Since the manufacturing sector is a major, major source of cyclical variability in the economy, this report has a big influence on the markets.  And remember, it cannot be revised once the number is released.

A few ISM sub-indices provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on these sub-indices to help determine the direction of their interest rate decisions (in case inflation signals are flashing). Since inflation leads the bond market, the bond market is highly sensitive to the data listed in these sub-indexes.

Old Map (11)

ISM Manufacturing Correlations

The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market (existing bonds are valued higher when interest rates are expected to fall).

Also, a healthy manufacturing sector, indicated by rising ISM index levels,  increases the expectation of higher corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall.

ISM Manufacturing, What Do The Numbers Mean?

Readings below 50 indicate a shrinking manufacturing sector but overall GDP growth is expected to remain positive until the ISM index falls below 42.5 (based on statistical data through January 2011). Readings between 42.5 and 50 suggest that manufacturing is in decline while GDP is still growing (very slowly).

As mentioned above, the various sub-components contain useful information about manufacturing activity. The production component is related to:

  • industrial production
  • new orders to durable goods orders
  • employment to factory payrolls
  • prices to producer prices
  • export orders to merchandise trade exports
  • import orders to merchandise imports.

Vendor (supplier) deliveries are another important component of report. The more slowly orders are filled and delivered (inventory turnover), the stronger the economic growth and expectation of higher inflation. When orders are filled quickly, it means that producers don’t have as many orders to fill (or there is a supply glut).

The ISM manufacturing composite index and its sub-components may show monthly volatility, so check the three-month average of the monthly levels to spot the trend and calculate the probability of an interest rate change.

Purchasing Managers’ Manufacturing Index (PMI)

Economic Calendar

What is the Purchasing Managers’ Manufacturing Index?

Based on monthly surveys of selected companies, the Purchasing Managers’ Manufacturing Index (PMI) is an advance indication of month-to-month activity in the private sector of the economy. It tracks changes in variables such as output, new orders, stock levels, employment and prices across manufacturing industries.

The final index for the current month is released roughly a week after the flash PMI.

Why is the Purchasing Managers’ Manufacturing Index important?

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index in the U.S. & the Markit PMIs in the U.S., and elsewhere, investors will know what the economic backdrop is for various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • The government likes higher corporate profits so it can collect more tax revenue to fund political projects and wars.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
John Seney, 1721
Map of the New World, John Seney circa 1721

The Markit PMI

The Markit PMI manufacturing data give a detailed look at the manufacturing sector. The manufacturing sector is a major source of cyclical variability in the economy and this report has major influence on the markets. Its sub-indexes provide a picture of orders, output, employment and prices.

  • April 2004, Markit begins collecting monthly U.S. PMI data from a panel of manufacturers in the U.S. electronics goods producing sector.
  • May 2007, Markit’s U.S. PMI research was extended out to cover producers of metal goods.
  • October 2009, Markit’s U.S. Manufacturing PMI survey panel was extended further to cover all areas of U.S. manufacturing activity.

Back data for Markit’s U.S. Manufacturing PMI between May 2007 and September 2009 are an aggregation of data collected from producers of electronic goods and metal goods producers, while data from October 2009 are based on data collected from a panel representing the entire U.S. manufacturing economy.

Markit’s total survey panel comprises over 600 U.S. companies.

Markit Economics PMI Release Dates.

Japanese PMI Composite

Economic Calendar: The Japanese PMI Composite

 

Japanese Purchasing Managers Index

The Markit Japanese Composite Purchasing Managers Index (Composite PMI) is based on original survey data.  These data are collected from a panel of firms that represent, and are based in, the Japanese manufacturing and service sectors.

The major composite index is composed of two minor indices.  It is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.  These are all based on original survey data collected from a representative panel of over 800 Japanese-based firms that serve Japan’s manufacturing and service sectors. The survey data is collected mid-month.  Survey responses reflect change in the current month compared to the previous month.

Old Map (21)

Is The Japanese PMI Composite Important?

Yes!  PMI Data is an important macroeconomic indicator.  Investors need to keep their finger on the pulse of the economy to form expectations of how various types of investments will perform. By tracking economic data such as the PMI numbers, investors will get a better picture of what the economic backdrop is for the various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • Governments like to keep markets inflated because a portion of those corporate profits (and inflated assets) are converted into tax revenue.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly (inflation).

Click this, list of PMI data

Sails Up

Long The Japanese Yen.

↓ CAD/¥

The global macro picture looks squared away: swap dealers are short CAD and long Yen; institutional managers are actively buying Yen contracts.  Bond activity indicates risk-off verifying ¥ long positioning.  Retail positioning is not optimal and BoJ numbers are due out this week so a wide stop.

The charts show good CCI Divergence on the daily and weekly.  Stop is set north of ¥92.  Position size is a full bell.

Update:  10/01, order triggered; 10/18, closed at +2.4% of margin;

 

↓ €/¥

Similar global macro factors with institutional managers  actively closing their euro shorts.  CCI divergence on the weekly; stop-loss is set above the weekly high.  A correlated trade so I will be trailing the stop on this pair if it triggers. Risk taken is a 2/3 bell.

Update: 10/01, order triggered;  10/18, stopped out, -1.94% loss on equity

Trader Error:  this trade was held too long, I was away from my laptop and missed the profit target on the morning of 10/16.

U.S. Industrial Production

What Is The Federal Reserve’s Industrial Production Index?

Always Check The Economic Calendar

The Federal Reserve’s monthly index of industrial production (and the related capacity indexes and capacity utilization rates) covers manufacturing and mining; along with electric & gas utilities.

The industrial sector, along with construction, accounts for most of the variation in GDP over the course of a business cycle. The production index measures real output and is expressed as a percentage of real output in the base year, 2012.

The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of the actual output of 2012 (base year). The rate of capacity utilization equals the seasonally adjusted output index expressed as a percentage of the related capacity index.

The index of industrial production is available by market and industry groupings. The major groupings are:

  • final products (consumer goods, business equipment and construction supplies)
  • intermediate products and materials.

Why is U.S. Industrial Production important?

Investors want to keep their finger on the pulse of the economy because it forms expectations on how various types of investments will perform.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • The bond market prefers more subdued growth that won’t lead to inflationary pressures.

Tracking economic data like U.S. industrial production gives investors and traders an idea of what to expect in each market.

The Fed’s Index of industrial Production

The index of industrial production gives us an idea of how much factories, mines and utilities are producing. The U.S. is a consumer-based economy.  The manufacturing sector accounts for less than 20 percent of the economy, however most of it is cyclical variation. Consequently, this report has a big influence on market behavior.

Why does such a small ratio of the economy wield so much influence in the eyes of investors? Remember,  variation = volatility.  Volatile markets will either make or break an account.

Every month, we can see whether capital goods, or consumer goods, are growing more rapidly. Are manufacturers still producing construction supplies and materials? This detailed report shows which sectors of the economy are changing.

Now, the capacity utilization rate is a bit different.  It provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (80-85% range), it can lead to inflationary bottlenecks in production.

The Federal Reserve watches this report closely and supposedly …arguably …sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures -when you hear about changes in inflation, think fixed income, think bond market.

Remember, in finance “fixed income” does not mean your grandparent’s monthly government subsidy.

The bond market can be highly sensitive to changes in the capacity utilization rate. However, in this global environment, global capacity constraints may be more significant to fixed income than domestic capacity constraints.

The Meaning of It All

Industrial production and capacity utilization indicate trends in the manufacturing sector, but also whether resource utilization is strained enough to forewarn of inflation.

Also, industrial production is an important measure of current output and helps investors identify turning points in the business cycle –recession expected, get ready to buy equities  …recovery expected, be prepared to sell.

The bond market will rally with slower production and a lower utilization rate as capital flows out of equity and into bonds. Bond demand will fall when production is high and the capacity utilization rate suggests supply bottlenecks.

The production of services has gained prominence in the United States, but the production of manufactured goods remains key to the economic business cycle. A nation’s economic strength is judged by its ability to produce domestically.

Many services are necessities of daily life and would be purchased regardless of the business cycle. However, consumer durable goods and capital equipment are purchased when the economy is expected to strengthen.

When expected demand for manufactured goods decreases, it leads to less production along with declines in employment and income.

The three most significant U.S. sectors are motor vehicles/parts (auto loan bubble?), aerospace and information technology. Volatility in any one of these sectors can affect the U.S. economy.

Industrial production is subject to some monthly variation. The three-month EMA or year over year percent changes provide a clearer picture of the trend.

If you want to learn how to connect the dots without spending thousands of dollars on the CFA exams, It’s all right here in the desk reference I use: Global Macro Trading

If you need a Kindle to read it on:  $15 Off A New Kindle Fire HD  or a $79 Kindle Reader

Homanns Heirs  c1746
Homanns Heirs c1746

Sails Up

↓€/£

Sails are up on this short trade due to global macro and technical confluence.

Global Macro

On the macro side, the COT report shows swap dealers are stretched long the GBP-USD contract and institutional managers are actively taking profit on their euro long positions. Also, the economic calendar lists favorable winds for the big island pound. However, BoE pirate meeting ahead so I will be keeping a weather-eye and trailing stops.

Technicals

The weekly shows good CCI divergence and a pair of tweezer tops on the four-hour chart.  Order triggered on the second pair of tweezer tops.  Lot size is a full bell with a stopper knot set at .9241.

Order triggered at  0.9180

Update:  09/10/2017,  2/3 of trade bulletproofed at 0.9175 & 1/3 of position set to scale-out at 0.9127 –tracking the 4-hour, later trailed to 0.9095.

Update:  09/11/17, closed out 1/3 of position at 0.9095.  Managing remainder of position on the daily chart.

Update:  09/18/17, entire position closed; gain on trade +43% of margin

Antique Maps of the WorldCelestial MapAndres Celariusc 1708
circa 1708