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Short Stock Trading Week is Long on Economic, Earnings Drivers

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November 23, 2015

How much potentially market-moving economic data can be stuffed into a shortened Thanksgiving week? Short answer: plenty.

U.S. markets are shuttered for Thanksgiving on Thursday and stock markets close early, at 1 p.m. Eastern, on Friday. Before then, a heavy report calendar front-ends the holiday week, including existing home sales stats on Monday, a revised look at Q3 gross domestic product (GDP) on Tuesday, and a snapshot of big-ticket spending in Wednesday’s durable goods report (see the full economic calendar below).

It’s a data roster that may simply confirm what Wall Street seems to have surmised: the Federal Reserve appears to be leaning toward initiating an interest rate hike campaign, possibly as soon as next month. But here’s what has changed. In recent sessions, stock bulls have embraced the calming effects of a confident Fed. Stock indexes logged their seventh weekly win in eight weeks through Friday (figure 1). And as long as rate hikes come in a slow drip—and can be viewed as the Fed’s endorsement of an improving economy—the stock market may have adequately braced for this change in rates.

SPX stock chart

FIGURE 1: QUITE THE STRETCH.

The S&P 500 (SPX), charted through midday Friday here on the new-look thinkorswim® platform, closed out its seventh weekly win in eight weeks, putting the psychologically significant 2100 line in play. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

But first, there are a few reports to get through. Housing remains a potentially key test of the breadth of economic growth. Other data shows us that hiring perked up in the fall. But did encouraged workers shop for their first home or move up a rung on the property ladder? If they shelled out for a new address at an increasing rate, it can have potentially positive effects on the mortgage industry to flooring manufacturing to home-cleaning services and plenty in between.

The economy, at least in a broad sense, flopped in Q3 when compared to Q2, according to GDP readings. The first run at calculating Q3 GDP revealed a 1.5% annual growth rate, down from Q2’s 3.9%. What could the revision that will be issued on Tuesday show? In the first release of Q3 GDP data one month ago, the consumer spending portion was encouraging despite sluggishness elsewhere. That appears to leave many GDP watchers largely shrugging off what may well be a quarterly anomaly. Most Street economists pointed to a temporary inventory drag and said the Q3 pause wasn’t likely enough to scuttle an expected rate hike next month.

In fact, rearview data may matter little as Q4 continues—its temperature is really the scene-setter for that December Fed meeting. The Atlanta Fed branch, which crunches a running estimate of growth in its GDPNow™ calculation, is pegging Q4 GDP at 2.3%—improved, but still a slowdown from earlier in the year.

Even if slower growth does materialize, some Fed members have insisted they don’t want to be behind the inflation curve. St. Louis Fed President James Bullard said in a Friday speech that the rate of inflation will soon gradually rise toward the Fed’s 2% annual target. Bullard has advocated for a hike at the Fed’s December meeting.

But of interest to markets—especially the currency market and holders of multinational stocks impacted by a strong dollar’s impact on overseas profits—the rate differential between the U.S. and other big economies is becoming more apparent. European Central Bank President Mario Draghi said on Friday that the ECB will deploy extensive stimulus measures to combat low inflation, which the financial press says keeps an ECB easing on the table for December. Just when Wall Street accepted the fate of higher U.S. rate, policy drama may only be beginning.

Green Tractors, Blue Boxes

The Q3 earnings season is winding down but two reports due out in the coming week offer a unique perspective on a diverse economy. The spending habits of those blessed with plenty of discretionary dough will be on display when Tiffany & Co. (TIF) issues its results pre-market Tuesday. The retail earnings period has been spotty, with some discounters surprising to the upside but most department stores missing the mark. Some specialty retailers warned for the upcoming holiday season, too. One missing piece to the puzzle:  the high end. Will TIF have any surprises in its little blue box?

And on Wednesday, farm equipment maker Deere & Co. (DE) checks in with its Q3 report card. The impact of slowing global demand and the sting of a strong dollar on overseas profits could factor in the report. That said, companies and markets have probably adjusted to those conditions and what’s ahead likely matters more. Watch for the potential impact on the industrial sector as the Street further assesses what a global slowing could mean for U.S. exporters.

And with the Holiday, Potential Volatility Buying

No doubt, it’s a week that offers plenty to be thankful for, including an extra few days with family, and the free markets in which we express our likes and dislikes about particular companies and, hey, even Fed policy.

But there’s some cold reality this week too—heightened sensitivity around travel in the wake of the terrorist attacks in Paris and elsewhere.

As such, and especially with trading hours reduced by vacation schedules, some traders may opt to buy short-term volatility contracts tied to the CBOE Volatility Index (VIX) and other indexes. That could drive VIX readings, which tend to diverge with the SPX, higher at the same time that stocks potentially hold stable/higher. It’s a relationship to keep an eye on. Will volatility elevate this week and is it simply holiday jitters, or an attitude that could remain in the weeks leading up to the Fed decision?

Good Trading,

JJ

@TDAJJKinahan

economic report calendar

FIGURE 2: ECONOMIC AGENDA.

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

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