How to Trade the US Core PPI: A Comprehensive Guide
Introduction
The US Core Producer Price Index (PPI) provides valuable insights into the price changes in goods and services at the wholesale level, excluding food and energy. 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 Core PPI report.
Understanding the US Core PPI
The Core PPI, released monthly by the Bureau of Labor Statistics (BLS), measures the average change over time in the selling prices received by domestic producers for their output, excluding food and energy. It provides a clear view of inflationary trends without the volatility caused by the food and energy sectors.
Why Core PPI Matters
- Inflation Indicator: The Core PPI is a crucial economic indicator as it reflects the underlying inflation trends by excluding volatile food and energy prices. It helps traders and policymakers understand the broader inflationary pressures within the economy.
- Influencing Policy: This report can influence the Federal Reserve's decisions, especially when it highlights trends in wholesale price changes. The Fed monitors various economic indicators, including the Core PPI, to gauge the health of the economy and make informed decisions about monetary policy. Significant changes in the Core PPI c
- Cost Pressures: The Core PPI reflects the cost pressures faced by producers. A higher Core PPI suggests increased costs that may eventually be passed on to consumers, leading to higher consumer inflation. This information is valuable for traders as it provides insights into potential future inflation trends.
- Complementary Data: The Core PPI adds context and depth to major reports like the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), helping traders form a more complete picture of inflationary conditions. By analyzing the Core PPI alongside other key economic indicators, traders can develop a more comprehensive understanding of the economy's overall health and make more informed trading decisions.
- Supply Chain Insights: The Core PPI also provides valuable insights into supply chain dynamics. It highlights issues such as supply shortages, input costs, and production bottlenecks, which can impact production and pricing. Understanding these supply chain trends can help traders anticipate potential disruptions and market reactions.
Why Core PPI Matters
- Lagging Data: The Core PPI reflects past price changes at the wholesale level, which means it may not have the immediacy of real-time data. While it offers insights into inflation trends, it is based on past data and may not fully capture current market dynamics.
- Tier 2 Status: It’s not as prominent as high-impact reports like the Non-Farm Payrolls (NFP) or Consumer Price Index (CPI), so it usually doesn’t create significant market waves. Traders often prioritize these more influential economic indicators over the Core PPI, leading to relatively muted market reactions.
- Market Expectations: The market may already have priced in expectations based on other economic data and forecasts. If the Core PPI comes in line with or close to expectations, it might not cause significant market movements. Significant deviations from expectations are required to generate notable market reactions.
- Frequency and Volatility: The Core PPI is released monthly, which means its impact can be diluted over time. Additionally, the wholesale sector may not exhibit the same level of volatility as other sectors like retail or services, which can limit the immediate market impact of the Core PPI report.
- Complementary Role: The Core PPI often serves as a complementary data point rather than a primary market mover. It adds valuable context to the broader inflation picture but may not have the same standalone impact as other major economic indicators. Traders use it in conjunction with other data to refine their trading strategies rather than relying solely on the Core PPI for decision-making.
- Lagging Revisions: Initial Core PPI readings can be subject to revisions in subsequent releases. These revisions can alter the initial market interpretation of the data. Traders may be cautious in reacting strongly to the initial release, knowing that revisions could change the overall assessment of wholesale price trends.
Trading Strategy for Core PPI
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 this piece of data, then the data point 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 the Core PPI 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 a lot of 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. Good thing you didn’t trade the GBP/USD.
Trade Execution Steps
- Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing inflation data. If inflation is a primary focus, the Core PPI 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 the reason 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 Core PPI, adjusting based on market conditions and volatility.
Step 3 - Choosing the Most Volatile Instrument to 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 stronger the release, the shallower the pullback. Moving to break even is essential because the market should want to buy off your S&R 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 US Core PPI 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 Core PPI report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.