How to Trade the Empire State Manufacturing Index: A Comprehensive Guide

Introduction

The Empire State Manufacturing Index (ESMI) provides valuable insights into manufacturing conditions in New York State. This guide will share the exact strategy that professional traders use to take money from the 95% of losing retail traders. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the ESMI report.

Understanding the Empire State Manufacturing Index

The Empire State Manufacturing Index, also known as the New York Fed’s Manufacturing Survey, measures the level of general business conditions in the manufacturing sector within New York State. Released monthly by the Federal Reserve Bank of New York, it provides a snapshot of manufacturing activity, offering timely insights into trends and economic health within the region.

The index is based on a survey of about 200 manufacturing executives in New York State, who provide information on various aspects of their business, such as new orders, shipments, employment, inventories, and prices. The survey responses are compiled into a single index value, with readings above zero indicating improving conditions and readings below zero indicating worsening conditions.

Key Components of ESMI

General Business Conditions: The headline index, reflecting overall manufacturing health.
New Orders: A sub-index measuring the volume of new orders received.
Shipments: A sub-index tracking the shipment of goods.
Employment: A sub-index gauging employment levels within the sector.
Prices Paid and Prices Received: Sub-indices measuring input costs and output prices.

Why ESMI Matters

Manufacturing Health

The ESMI provides immediate insights into the manufacturing sector’s health, a crucial component of the broader economy. Manufacturing is often considered a leading indicator because it is sensitive to changes in consumer demand and business investment. A strong ESMI reading suggests robust economic activity, which can have positive implications for economic growth and employment.

Economic Indicator

As a leading economic indicator, the ESMI can offer early signals of broader economic trends. Significant changes in manufacturing activity can precede shifts in other sectors, making the ESMI a valuable tool for economists, policymakers, and traders. For instance, an increase in new orders and shipments can signal rising demand, potentially leading to higher production, increased hiring, and greater economic output in the future.

Market Sentiment

Unexpected changes in the ESMI can significantly influence market sentiment and trading strategies. A better-than-expected ESMI reading can boost investor confidence, leading to higher stock prices and a stronger US dollar. Conversely, a weaker-than-expected reading can dampen sentiment, causing declines in equity markets and the dollar. Traders closely watch the ESMI for these signals, as they can provide opportunities for profitable trades.

Regional Insights with National Implications

Although the ESMI focuses on New York State, the region’s economic activity often mirrors broader national trends. As one of the largest and most economically significant states, changes in New York’s manufacturing sector can provide clues about the overall health of the US manufacturing industry. This regional perspective can complement national data, offering a more comprehensive view of economic conditions.

Influence on Federal Reserve Policy

The Federal Reserve monitors a wide range of economic indicators, including the ESMI, to inform its monetary policy decisions. Significant changes in manufacturing activity can influence the Fed’s outlook on economic growth, inflation, and employment. While the ESMI is not the sole factor in policy decisions, it can contribute to the broader economic picture that shapes interest rate decisions and other policy actions.

Why ESMI Often Won’t Move the Market

Regional Focus: It covers only New York State, which may not fully represent national trends.
Tier 2 Status: It’s not as prominent as NFP or CPI, so it usually doesn’t create significant market waves. Traders often prioritize other economic indicators over ESMI.

Trading Strategy for Empire State Manufacturing Index

Step 1: Analyze Federal Reserve Priorities

The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on manufacturing data, the ESMI report will have a significant amount of volatility because the Fed is in some way basing its interest rate decisions on that data release.

To quickly determine the Fed’s current focus, you can use our Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the Fed, providing a strategic advantage.

Step 2: Use High-Low Expectation Forecasts

Professional traders rely on high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at why these forecasts are crucial:

Institutional Forecasts: Professional economic calendars include high and low estimates from top institutions. This broader range of expectations offers a more comprehensive picture of potential outcomes.
Market Shocks: When a report exceeds the high estimate or falls below the low estimate, it’s a huge shock to markets because no analyst expected it. Such deviations often result in sharp market movements.
Lightning Bolt Feature: This tool immediately signals a deviation above the high or below the low of analyst expectations. When a deviation occurs, the lightning bolt feature alerts traders instantly, allowing them to act without delay. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.

Understanding High-Low Forecasts

Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading.

The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections.

In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections.

Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.

Step 3 - Choosing the Most Volatile Instrument to Trade

Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and ESMI shows a significant deviation, this pair could be an ideal target for trading.

City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
Risk-Reversal Report: This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders susceptible to getting liquidated upon the release of an economic data point.
CFTC Report: This report details hedge funds' positions. If many big players are long the EUR/USD but then data comes out in favor of the USD, some of those funds might have to unwind their positions, leading to an outsized move.

Trade Execution Steps

Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing manufacturing data. If manufacturing is a primary focus, the ESMI report will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is why data points that are focused on cause volatility.
Check Forecast Ranges: Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
Monitor Revisions: Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
Set Stop and Take Profit:

- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 15-30 pips for tier 2 events like ESMI, adjusting based on market conditions and volatility.

Managing the Trade

After the Initial Run: Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you’ve taken a few points off the table after your first entry.
Break Even: Move your stop-loss to break even as soon as possible to protect your gains. The market should want to buy off your support/resistance level and continue to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
Reentries: If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.

Conclusion

While the Empire State Manufacturing Index report may not always lead to significant market movements, understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations.

If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field.

By following these steps, you’ll be well-prepared to trade the ESMI report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.