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Jobs Data Crowns Busy Trading Week that Puts Washington in Spotlight

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September 28, 2015

Stock market volatility could ramp up as Capitol Hill’s budget scramble and Russian leader Vladimir Putin’s sit-down shares the Federal Reserve’s spotlight in coming days. It’s also a week dotted with fresh economic indicators, culminating in a September jobs report that leaves many wondering if hiring is hot enough to nudge the Fed into interest rate action?

Market logistics can’t be ignored either. Tuesday is quarter-end, a day that could induce stronger-than-usual volume as some fund managers and other large-scale investors make portfolio shifts. Chinese markets—the source of plenty of global stock market turbulence of late—are shuttered for a holiday late week. That leaves some uncertainty for the scale of action leading up to the celebration. Be aware.

What’s more, a few earnings reports due out over coming days could reflect the continued impact of a strong dollar and a global slowdown on multinational profits. These reports are just a taste; the heart of earnings season kicks in with the October 8 release from Alcoa (AA).

Against this multi-pronged news backdrop, stocks remain locked in a period of volatility that had all but disappeared for much of 2015 until a late-summer stir. Over the past month-plus, more than half of the trading sessions for the broad S&P 500 (SPX) featured moves of at least 1% in either direction (figure 1). That may not soon end.

spx-stock-index

FIGURE 1: FOUR STRAIGHT.

A one-year view of the S&P 500 (SPX) charted on the new-look thinkorswim® platform reveals wider intra-day movement. SPX on Friday logged a fourth consecutive lower close, tugged down by a drop for biotechnology shares. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Rethinking Volatility

One closely followed broad-market volatility measure, the CBOE Volatility Index (VIX), has charted a new range since the late-August and early-September rumblings.

It’s worth repeating that the VIX “20” area may be here to stay for some time—a potential new normal for volatility watchers. That’s a historically used threshold that at one time divided a volatile market reading from a relatively tame market reading. In fact, VIX has logged a reading north of “20” for 25 consecutive market sessions through last Friday (figure 2).

VIX-volatility-index

FIGURE 2: VIX’S NEW NORMAL?

The CBOE Volatility Index (VIX), the market’s “fear gauge” tracked here on the new-look thinkorswim® platform, continues to churn above 20 yet below 25 as the broader stock market reassess risk and volatility. For now, VIX has logged smaller intra-day moves in recent sessions. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

Government Shutdown Risk

A Fed-obsessed Wall Street has been fairly quiet about another Washington budget stalemate. But the risk of a potential government shutdown over federal budget issues is one potentially anxiety-inducing factor for upcoming trading sessions. And it revives the longer-term debate surrounding a lasting budget pact and a debt-ceiling increase.

U.S. House Speaker John Boehner, who shocked the political and investing world with his surprise resignation last week, told the Sunday news programs he’s confident that Congress will avoid a shutdown this week. Boehner said he plans to push through as much unfinished business as possible before his end-of-October departure. Investors may appreciate this diligence but are also left twisting a bit. Will debt-ceiling questions factor into this week’s last minute scramble or be saved for another day?

During the 2013 government shutdown, the SPX logged a 3% gain. Of course, the context was different. The index, still roaring back from the financial crisis, recorded a 30% advance that year. So while government inaction raised public ire then it wasn’t enough to stifle the bull-run. Does the current climate of high volatility, global economic uncertainty, and choppy trading change the risks?

Now, President Obama heads to the United Nations and Middle East tensions are expected to factor in the agenda. President Vladimir Putin said Russia had no plans "right now" to put combat troops on the ground in Syria, but would continue backing the Syrian government, according to several news reports.

The Russian leader was interviewed Sunday on the eve of his U.N. meeting with Obama. By most accounts, Putin’s statements show how far apart Russia and the U.S. remained on Syria going into Monday's meeting between the two presidents. Direct market impact? Perhaps negligible for now. But the risk of a new strain on U.S. defense spending and any potential for commodities markets disruptions can become a very real stock market issue pretty fast. All told, it’s one more big-picture political issue that could cloud investor ability to focus on the micro topics, including earnings.

Consumer Spending Check-In

Wall Street has braced for weakening earnings into late-2015, tweaking forecasts and potentially setting up a trend of in-line, or even Street-beating, results. It begs the question: even with a reality check, are investors sufficiently prepared for the bite that a slowing China could have on U.S. corporate revenues?

China’s impact is a mixed bag so far: Caterpillar (CAT) announced a spate of job cuts last week and warned about China; Nike (NKE) execs, in an earnings report also out last week, remained relatively confident about Chinese shoe-buying prospects.

And then there’s the U.S. consumer. Two participants in this week’s light earnings schedule could offer hints on spending strength. On Monday, Vail Resorts (MTN) reports and on Tuesday, Costco Wholesale (COST) comes out with earnings.

Fed’s Yellen: Business as Usual

A host of Fed officials are scheduled to speak this week, including Chair Janet Yellen, New York Fed President William Dudley, Chicago President Charles Evans, and San Francisco President John Williams. All could hold potential clues to the scope and speed of the Fed’s move to remove what essentially was emergency monetary policy.

Last week, Wall Street tossed aside its general worry about higher interest costs to express relief at the prospect of a rate hike in the near future. Yellen told a crowd at the University of Massachusetts-Amherst that an initial rate hike is likely appropriate this year. The Fed, which passed on a rate hike at a September meeting that was too close to call, meets again in October and December.  Analysts said stock investors appear encouraged that the Fed has the reins again and that U.S. economic growth, while spotty, is returning to a clip that could allow the Fed to remove the emergency ultra-low interest rates only put in place to pull the U.S. out of recession.

Will the Hiring Clip Pick Up?

This week’s data may have something to do with how soon the Fed acts. Housing and manufacturing figures hit earlier this week (see the full calendar in figure 3) but the real story is likely to be the late-week jobs report. Wall Street economists are expecting an average of 205,000 new jobs on the September payrolls in the report due out Friday morning. That’s up from August’s 173,000 (a figure subject to revision) and is moving at a pace that most observers say reflects a strengthening job market. The unemployment rate, calculated from a different survey but released at the same time, is expected to hold at 5.1%.

Report details could matter even more than the headline figures. In August, a separate measure that includes those who have stopped looking for work or are working part time for economic reasons edged lower to 10.3%. The labor force participation rate remained near its lowest level since the late 1970s at 62.6%. What will these September readings show about worker and employer confidence? Americans have been spending on cars and homes, two of their biggest purchases. Can this continue, and at a rate that prompts the Fed to take away some of the extra economic juice it’s delivered via near-zero interest rates?

Good trading,
JJ
@TDAJJKinahan

economic-indicator-calendar

FIGURE 3: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com.

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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