07.10.2016
By Terry Flanagan

TRADING THE WEEK: Is the Fed Back in Play?

Just when Federal Reserve seemed on hold for the indeterminate future, a strong jobs report brought a 2016 rate increase back to the realm of feasibility.

Data on Friday showed the U.S. added 287,000 jobs in June, well above market expectations of about 180,000. The robustness was in stark contrast to the May number, which was revised to a negligible 11,000.

“The hot jobs number is giving financials a lift — maybe an interest rate hike can happen this year yet,” a proprietary trader said on Friday. “Not surprisingly, the crowded ‘chasing yield’ trade is starting to unwind a bit this morning as utilities and defensive names are very weak.”

The Fed is expected to stand pat when it meets later this month, but there are subsequent meetings in September, November and December. Market expectations of a rate increase sometime this year doubled to about 24% on the heels of the June jobs number, according to pricing in federal funds futures contracts.

Volume traded on U.S. equity exchanges averaged 7.4 billion shares per day for the holiday-shortened week ended July 8, according to Bats Global Markets data.  That’s down from 10.3 billion in the previous week, but a bit higher than the 7 billion share daily average for the week ended July 10, 2015.

The market gave back some of its post-Brexit rally during the week, but traders noted the retrenchment was limited. Volatility diminished, as the notion of the UK leaving the EU was seen as less of a risk to global growth, at least in the short term. The CBOE Volatility Index declined to 13.6 on July 8 from 14.8 one week earlier; current levels are well below the 25 level seen as recently as two weeks ago, at the height of the Brexit worry.

This week, the focus will be fundamentals, i.e. corporate earnings reports.

“Alcoa kicks off earnings season Monday night, but the real earnings season will start later in the week when we hear from JPM, WFC, C, and INTC,” the prop trader said. “This market is very resilient and if we get a couple of nice reports early, we could hit all time highs in the S&P. The bulls remain firmly in control.”

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