Can NFPs Override Expectations of Quiet and Pull S&P 500 from Record Highs?

Can NFPs Override Expectations of Quiet and Pull S&P 500 from Record Highs?

We are passing through the height of ‘summer doldrums’ and the expectations for a late-in-the-week NFPs release doesn’t help the case for volatility restraint. Here’s what to expect next week.

Talking Points:

• The coming week is the height of the ‘summer doldrums’ historically…but the period that follows has averaged among the most active conditions of the year
• An end of the week, top event risk once again draws attention forward through the week, potentially snuffing out early-in-the-week volatility
• Top event risk over the coming week includes emerging market Q2 GDP reading; US manufacturing and service sector PMIs and Friday’s US NFPs

A Seasonal Norm Versus a Headline Favorite This Week

The economic docket through the coming week houses a fair share of high importance scheduled releases and backdrop of fundamental themes has ensured a healthy run of financial headlines looking to seize the market’s innate interest. If that were the only consideration for evaluating the market’s capacity for generating volatility or committing to a clear systemic trend, it would seem that an extension to record highs or loaded correction for speculative benchmarks would be a hearty probability. However, underlying conditions are likely to play a critical role in shaping the kind of movement the financial markets experience over the week.

Historically, we are entering the end of the so-called ‘Summer Doldrums’. This is often defined as the week of the US Labor Day holiday (typically the 35th week of the calendar year) which stands as a pivot from holiday-shaped restriction in participation to a return of more typical market depth. Using the S&P 500 as a benchmark for speculative sentiment, the index has averaged fairly tepid performance through the period; but the volume tends to bottom out through the period. Looking a little further ahead, turnover tends to increase sharply and volatility (via the VIX) extends a norm of a steadfast climb.

S&P 500 and Volume Calendar Week Averages over 100 and 75 Years

  

Source: John Kicklighter, Standard & Poor’s 

 

A Hearty Docket and Another Look Forward to the End of the Week

While historical norms and expectations can play a factor in keeping the market more passive that some active traders may prefer, there are some conditional factors to our current environment which may add further weight to an inertia – and perhaps even with a bullish lean. Thought there was a modest retreat for some risk-based benchmarks this past week (like the Nasdaq 100), many of the favorite references for speculative bearing are in close proximity to their record highs. When the collective view is reticent to fuel a strong trend, the threshold for reversal can be set even higher. This often leads to the periods where market observes claim the markets are unmoored from fundamentals or even ‘bad news is good news’.

More likely, we just don’t have the conditions to catalyze fundamental fuel into genuine movement. Adding to the skew which translates into a stretched bullish position that is hard to extend at pace and restriction to steering the market to a full-blown reversal is the moderation of concern around once pressing themes (eg hefty US tariffs are in place and confusing as to their details) and definitive updates on others are set further out (such as Friday NFPs or the next FOMC decision in two-and-a-half weeks). This is a market in which watching the headlines for the unexpected is more important than the macro calendar.

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

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Economic Activity for the Victims of the Trade War

As significant as the top event risk through the coming week may be, it is important to evaluate the market picture through the liquidity restraints of the seasonal, holiday drain centered on the US Labor Day holiday. Combine that with the lost traction of top fundamental themes (rate speculation, trade wars) and the anticipatory nature of a focus on Friday’s top event risk – US NFPs – and there will be pall cast over the potential for event-driven volatility. Nevertheless, what we lack in immediate, short-term volatility; there is a build up in underlying fundamental trends.

The first consideration for top event risk over the coming week is a charge that will be distributed over the entire week: emerging market and smaller developed economy GDP readings. These tend to be more ‘dated’ updates but they carry the hallmark of being official. On tap, we have Turkish 2Q GDP on Monday, Brazil’s update on Tuesday, Australia and South Africa on Wednesday. Individually, these are readings have the capacity to generate heat in local markets and currencies; but systemically, the bar will be high to foster a course nudge to broader risk appetite.

IMF Growth Forecasts from July WEO Update

  

Source: IMF World Economic Outlook 

 

US Economic Activity Receives an ISM Update

From the larger of the emerging market and ‘smaller’ developed countries, the economic health conversation will shift to the world’s largest economy: the United States. We absorbed the 2Q US GDP reading some weeks ago and the third quarter update is not do for some weeks out into the future. That said, we have a much more timely update on the country’s health due this week via the ISM’s PMI surveys. The August updates for manufacturing (Tuesday) and service sector (Thursday) activity offer a very useful proxy for general economic activity…and trade activity, employment conditions and more.

The manufacturing report is the first to cross the wires. It reflects less of the global market but it is arguably a more direct target of the aggressive trade policies that the Trump administration has pursued. If US factory activity is not showing signs of recovery in the wake of the cut to globalization, the net impact for risk trends may start to waiver. As for the service sector report, it represents more than three quarters of GDP and employment. If this reading doesn’t offer some encouragement, it can raise a serious flag of concern over the intermediate fundamental future.

Chart of the S&P 500 Overlaid with the ISM Manufacturing and Services PMIs (Monthly)

   Source: Standard & Poor’s, ISM 

Waiting for the NFPs to Cross the Wires…And Give Trump Fuel for the Fire

Finally, the third listing for notable global macro listings for the week ahead is arguable the most potent for headline dominance and historical volatility capacity. The August US nonfarm payrolls change from the BLS will receive heavy financial media coverage regardless of the outcome – beat, miss or meet expectations. The issue at hand is not the labor market’s general trend to moderation in employment growth but rather the heightened focus on this side of the dual mandate as far as President Trump could use any unflattering reading as economic justification to push ahead with his fight against the Fed to lower benchmark lending rates.

Between a net job loss or a step up in the jobless rate (0.1 to 0.2 percentage point), the administration would likely jump on the former more aggressively to justify its attack. While a deteriorated labor market would normally add to the complicated discussion of balancing labor market conditions against persistent inflation, the narrative of a White House pushing for aggressive rate cuts would likely push the market to interpret it in the context of driving uncertainty as to what is dictating monetary policy setting in the United States.

Chart of US Change in Nonfarm Payrolls and Level of ‘Surprise’ (Monthly)

  

Source: John Kicklighter, US Bureau of Labor Statistics 

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--- Written by John Kicklighter, Global Head of Content