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Stock Market Week Ahead: Consumer Spending, Energy Swings

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December 7, 2015

Hired? Yes. But spending? After the increase in November payrolls reported on Friday, this week’s economic lineup of consumer sentiment, mortgage demand, retail sales, and other reports (see the full economic calendar below) could help fill in some gaps for investors trying to stay a step ahead of the Federal Reserve.

The fuller picture of consumer strength could set the scene for a Fed that’s meeting December 15-16 and deciding whether now is the time for the first interest rate hike in nearly a decade. The Fed has been trying to wean the economy from the ultra-loose monetary policy in place since the recession, but timing has been a moving target complicated by weak commodities and anemic growth in select areas around the globe.

Stocks gained sharply Friday (figure 1), grabbing back all of Thursday’s retreat (the steepest decline in two months) at one point. That left the major averages on track to end the week little changed. Investors appeared to grow confident that “normalization” at the Fed could be a good thing, especially if the pace of hiring picks up as industry economists are expecting.

For now, the U.S. economy added 211,000 new jobs in November, topping a general Street consensus for about 200,000 nonfarm jobs. The unemployment rate was unchanged at 5%, kept in place by more people joining the labor force in search of work, Labor Department statistics show. The labor-force participation rate was up a tick to 62.5%. Employment gains for October and September, meanwhile, were revised up by a combined 35,000. In fact, stats show that 298,000 new jobs were created in October instead of 271,000, for the biggest gain of 2015.

Fed Debate Expected

Of course, wage growth is still a potential sticking point and fodder for dovish Fed members. Average hourly wages paid to American workers rose 0.2% in November, a bit slower compared to the prior month. 

It’s this lingering uncertainty, plus plenty of energy market volatility, that could keep things interesting for the Fed and for stock traders. Some industry analysts noted that Friday’s stock market recovery was so strong only because Thursday’s drop looked overdone. When all was sorted out, the economic picture facing a deliberating Fed had not really changed. Now, some would argue that the global picture is only getting more complicated. They pinned Thursday’s drop on disappointment after the European Central Bank offered a smaller-than-expected expansion of its monetary stimulus program. That’s right. It’s not just our own Fed that matters right now.

All told, it appears that stock traders’ nerves are up at least a little bit heading into mid-month. A quick glance at the CBOE Volatility Index (VIX) futures pricing chart shows volatility expectations rising during the week of the Fed’s December 15-16 meeting. That week includes the potential added volatility of “quadruple witching”—the expiration of futures and futures options on top of stock and index options. 

SPX stock chart

FIGURE 1: NEW TESTS?

The S&P 500 (SPX), charted through midday Friday on the thinkorswim® platform, looked to again challenge the psychologically significant 2100 line. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Oil Likely a Hot Topic

U.S.-traded oil futures on Friday fell briefly back below $40 a barrel, as the Organization of the Petroleum Exporting Countries (OPEC) tacitly agreed to keep pumping crude at current production levels. Crude prices have fallen in the face of heavy global supplies and demand uncertainty from China and other big customers. In fact, stock weakness last week could sometimes be pinned on declines in energy shares.

OPEC made no mention of a production target in their final communiqué. OPEC President Emmanuel Ibe Kachikwu told reporters that members saw no need to mention a hard figure but that there had been agreement to maintain a ceiling that reflects “current actual production,” according to financial press covering the meeting.

While OPEC previously had a production ceiling of 30 million barrels a day, members have been producing closer to 31.5 million barrels a day, according to market estimates.

Crude fluctuations—and any related economic or stock market fallout—are likely to continue to drive trading—at least right up until the Fed steals the show.

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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JJ Kinahan

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

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