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Traction for U.S. Stocks after Solid Private Hiring Data, Europe’s Optimism

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June 3, 2015

Choppy trading near record highs for the major stock indexes is getting a little boring, but it’s also been a productive time for some traders as they’re buying the dips. Dollar strength, attention on Europe, and the looming payrolls report due out on Friday are so far keeping a lid on activity.  Volatility is a bit of a mystery, edging higher over a couple of sessions although still obviously near 2015 lows (figure 1). We could see the CBOE Volatility Index (VIX) increasingly draw short-term interest between now and Friday’s report.

European stock markets are firmer, lending support to U.S. indexes, as European Central Bank (ECB) officials are increasingly yet still cautiously upbeat for some pickup in inflation. Yes, they need a little for the economy to find some grip. "Our monetary policy measures have contributed to a broad-based easing in financial conditions, a recovery in inflation expectations and more favorable borrowing conditions for firms and households," ECB President Mario Draghi said at the news conference following the bank's decision to hold steady on interest-rate policy. It at least deflected attention from Greece’s debt negotiations for a short while.

Stock-Volatility-Higher

FIGURE 1: VIX TESTS 15.

The CBOE Volatility Index (VIX), known as the market’s “fear gauge,” nosed back above 15 intraday on Tuesday, its highest in roughly three weeks. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Something is Sticking. The European Central Bank on Wednesday said it's become more upbeat in its inflation outlook for 2015, with quarterly staff projections rising to 0.3% in 2015, up from the March forecast for a flat reading. The 2016 inflation projection is unchanged at 1.5%, while 2017 is seen at 1.8%, in line with the previous forecast.

Dollar Diversion for Stocks. But Europe’s policy action isn’t exactly clear cut for U.S. stocks. The U.S. dollar continues to flex its muscle against the euro and other leading currencies. That returns a familiar theme to Wall Street. Will a beefy buck impede earnings results for the major multinationals in coming quarters? A strong dollar is also helping to push up commodities markets, keeping crude near $60 a barrel.

Private Sector Lengthens Payrolls. Private-sector employment picked up in May as businesses added 201,000 jobs, the most in four months, although a touch off Street expectations. The jerky growth of the job market has challenged economists. No surprise, services industries led the growth. The report could encourage industry economists to nudge up their forecasts for Friday’s closely watched, government-issued jobs report. Currently, economists polled by MarketWatch expect the government’s report to show nonfarm employment rose by 210,000 jobs last month, compared with an April gain of 223,000 jobs.

Good trading,
JJ
@TDAJJKinahan

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