Japanese PMI Composite

Economic Calendar: The Japanese PMI Composite

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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.

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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

British Retail Sales

How important are British retail sales?

Always check the economic calendar

The British Retail Sales Survey

Retail sales are the total revenue from stores that sell durable and nondurable goods. British retail survey data include all online businesses whose primary function is online retail.  The data also cover internet sales by other British firms, such as supermarkets, department stores and catalog companies.

Headline British retail sales are reported in volume terms but are available in both forms. The data are derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes the 900 largest retailers and a representative panel of smaller businesses, including internet sales.

Collectively, all of these businesses cover approximately 90 percent of the retail industry –in terms of turnover.

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The survey data covers 90% of Brit retail

Why are British Retail Sales important?

Consumer spending is a major component of the economy and market players continually monitor spending patterns. The monthly retail sales report contains sales data in both pounds sterling (£) and volume. British retail sales data exclude automobile sales.

The pattern in consumer spending is often the foremost influence on stock and bond markets.

  • For equity, strong economic growth translates to healthy corporate profits and higher stock prices.
  • For fixed income (bonds), the focus is whether economic growth is stretched overboard and leading to inflation –building a case for interest rate hikes and decreasing the expected value of existing bonds.

The ideal economy walks a fine line between strong growth and excessive (inflationary) growth.

The British Retail Sales survey not only gives you a sense of the big picture on the big island, but also the trends among different types of retailers. Perhaps ground tackle sales are showing exceptional weakness but navigation electronics sales are soaring (have you seen those prices lately?!). Trends derived from retail sales data can help you spot specific investment opportunities and preempt expectations.

British Office of National Statistics

 

U.S. Philly Fed Survey

What Is The Philly Fed Survey?

Philly Fed Business Outlook Survey

This business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district of the United States.  It is widely followed as an indicator of manufacturing sector trends.  Most important is its correlation with the ISM manufacturing index and the index of industrial production.

Why is this important?  By tracking economic data such as the Philly Fed survey, investors will get a picture of what the economic backdrop is for the various markets.

The Philly Fed survey gives a detailed look at the manufacturing sector’s course and speed. Since manufacturing is a major sector of the economy, this report has an influence on market behavior.  Generally, change in manufacturing activity is positively correlated to change in currency demand.

Lastly, some of the Philly Fed sub-indexes provide insight on commodity prices and other clues on inflation (affecting fixed income). The bond market is highly sensitive to the Philly Fed Survey because it is released early in the month before other important indicators thus forming expectations that traders and investors act upon.

Fair Winds!

Antique Maps of the WorldMap of Europe Willem Blaeu c 1650
circa 1650

Confluence

Preparations are key.

Preparations

Would you cast off the lines before checking for foul weather?  How about leaving port without a radio check?  Ever been at sea without a storm anchor?  Would you enter the harbor without checking the tide?   Only if you’re an Oscar.

To navigate the sea of emotion and fear in the markets, you must be able to asses the waves, weather and readiness of the ship.  All in conjunction with one another.

Some refer to this as “stacking confluence:”

  • Market Condition:  check charts, avoid indecision and choppy waters.
  • Market Phase: enter when the tide pulls back.
  • S/R: go long from support lines & short off resistance lines.
  • Indicators: If you use a compass,  understand its underlying principle.  
  • Price Patterns: Look for one of the primary price patterns.
  • Candlestick Patterns: keep an eye out for deceleration in price.

Any less than four given factors and I tie-off to starboard, sails down.

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U.S. Nonfarm Payroll (NFP)

All about the Nonfarm Payroll (NFP)

Always check the Economic Calendar

Later today, there will be released two separate surveys in one report. The first is a survey of 60,000 households (called the household survey). Workers are counted once, no matter how many jobs they have, or whether they are only working part-time. To be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The second survey is the Establishment Survey –a survey of over 557,000 worksites. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job.  Always keep in mind that this is just a single indicator.  One that appeals to the emotions of many traders, but is hardly representative of the overall economy.

Market reactions to this indicator are usually dramatic.  The employment data given is comprehensive on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers guide, not determine, the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it’s a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline – boosting up bond and stock prices in the process.
The employment situation is the primary monthly indicator of aggregate economic activity; it encompasses all major sectors of the economy. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. The Fed has emphasized that it is overall labor market conditions that matter – not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates.

The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. These figures aren’t adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.

90% of the time, I close out 90% of my positions the week of the NFP release.cropped-old-map-36.jpg