After one of the craziest weeks in memory, Wall Street digs in for more volatility as investors revalue the stock market. This mind shift plays out against China’s economic struggles and a new guessing game for Federal Reserve interest rate policy.
Contrary to what many may believe, the S&P 500 (SPX) actually finished last week higher, logging a 0.9% gain. This wrapped a volatile few days that included a loss of as much as 6.6% at one point last Monday (figure 1 and figure 2).
It begs the question: how will August finish and September kick off? Asian stock markets—the genesis of the recent retreat—closed the books on their worst monthly performance in more than three years as today’s closing bell chimed. A slowdown in China’s economy, magnified by devaluation of the Chinese yuan earlier this month, accelerated Shanghai’s selling stampede. That swept up U.S., Asian, and European markets, as well as commodities and emerging market currencies last week. The Shanghai Composite Index ended down 12.5% this month, its third straight month of declines. August marked a close runner-up to July’s 14% loss, which was the index’s biggest monthly drop since August 2009.
Volatility hasn’t been relegated to stocks alone. U.S.-listed crude and Europe’s Brent crude gained 11.8% and 10.1%, respectively last week. In the same week, oil prices had slipped to multiyear lows, but clawed back to climb 16%-17% over the final two trading sessions. Keep an eye on oil’s drag on the broader commodities space and on energy-related stocks.
The Federal Reserve convened its annual Wyoming retreat late last week and over this past weekend. As it stands now, what looked like a near-lock for a rate hike in September has been thrown into question amid the volatility in global markets and worries over the possible economic fallout from that stock rout.
It seems the Fed’s not so sure. On Wednesday, New York Fed President William Dudley seemed to close the door on a September rate hike, saying it looked “less compelling” based on market turmoil.
But at the end of the week, Fed Vice Chairman Stanley Fischer suggested that markets might calm down quickly, setting up a rate decision largely independent of short-term market swings.
Projected rate-hike odds did shift again from those priced in during the worst day of stock market pain. The news out of Jackson Hole, when taken in conjunction with low-inflation improvement in recent numbers, put the probability of a rate rise in September at 34%, according to Friday pricing in the Fed fund futures market. Those odds are up from 25% last Wednesday.
Jobs Report Headliner
The jobs report at the end of the week (full calendar in figure 3) is what will have tongues wagging in the coming days. It will draw even more attention than usual because it comes less than a month before that Fed rate decision. Wall Street economists expect about 220,000 new jobs in the August tally.
Some data points before then may help fill in the picture, including auto sales on Tuesday. Economic bulls are likely looking for signs that the torrid pace of sales over the last nine months continued. Wednesday features the Fed’s Beige Book collection of economic anecdotes from around the nation issued.
I’m not sure how many market participants had counted on quiet late-summer action in the lead-up to the long Labor Day weekend. Many more may be hanging around. Either way, strap yourself in.
What's Driving Volatile Markets?
Listen in as S&P Capital IQ panelists give their perspective on the latest stock market correction.