08.08.2016
By John D'Antona

TRADING THE WEEK: Jobs Report Enlivens Market; Rate Hike Eyed

The equity markets looked at Friday’s U.S. jobs report and ran with the positive data as traders bought ahead of a potential Federal Reserve hike in interest rates.

In July, the economy added 255,000 non-farm jobs, well above consensus expectations of 180,000 as per Thomson Reuters. Also of note was that hourly earnings edged up 0.3 percent, showing the consumer has a bit more cash to spend. The unemployment rate of 4.9% was unchanged from June.

The Dow Jones Industrial Average jumped more than 100 points at the open on the bullish news, erasing most of its losses posted during the trading week. The S&P 500 index hit an all-time intraday high Friday morning. The healthy jobs report was taken as a sign that the economy, along with mild inflation indicators released both Friday and earlier in July, are strong enough to allow the Federal Reserve to raise interest rates as soon as next month.

On a related note, Friday saw the Bank of England cut interest rates for the first time in seven years – from 0.5% to 0.25%. The Bank also said that it could lower rates even more if the UK economy continues to sputter or get worse. This could lead to investors flocking to the US markets in search of higher yields – further boosting stock prices.

“Trading during the first week of August is typically light volume with muted moves and this was the path we took until Friday morning,” began Larry Peruzzi, managing director of international trading at Mischler Financial Group. “Traders were making small bets but Friday’s better-than-expected July non-farm payroll number, as well as a positive revision to June’s number, has markets rallying towards record highs once again.”

After the report, Peruzzi said volumes are looking 30% better than average for the summer.

“Looking back at the week we saw manufacturing data last Monday which was lighter than expected and while the June factory orders beat estimates, they still fell 1.5%,” Peruzzi said. “It feels like this market is growing increasingly dependent on central bank stimulus actions.”

Last week the volume traded on U.S. equity exchanges averaged 7.01 billion shares per day for the week ended August 5, according to Bats Global Markets data. That’s up from an average of 6.48 billion shares in the week ending July 29.

Looking ahead, Peruzzi said that after Friday’s spike in trading volume he anticipated a return to more seasonal light volume trading.

“We may see some profit taking today after Friday’s move,” he said. “Then the focus moves towards rates and inflation. Does this jobs report push Fed closer to raising rates? Tuesday’s non-farm productivity and unit labor cost and Fridays PPI data will garner interest too.”

Also of note for this week is the outlook for oil. According to one trader the recent build in inventories pushed crude back down to $40 a barrel, holding that level early last week enabled equities to halt further losses and set up Friday’s price surge.

“This week we will be watching Wednesday’s EIA weekly U.S. oil inventory report as well as OPEC’s monthly oil market report,” he said, to see if equities markets can get another boost.”

Also in the markets, as IEX approaches its Aug. 10 official launch as a new exchange, traders were also talking about how incumbents Nasdaq and NYSE were probing the waters of adding a ‘speed bump’ or some type of delay to their trading platforms. Nasdaq Chief Executive Officer Robert Greifeld said recently that the exchange operator has been asking customers what changes they’d like to see on Nasdaq’s platforms, with a speed bump being one of the options. NYSE Group President Tom Farley had previously signaled a similar willingness to explore adding a processing delay.

“IEX has the jump on these guys,” said one trader. “But that doesn’t mean NYSE or Nasdaq won’t catch up real fast and keep IEX from stealing too much market share. It’s something that bears watching.”

This Week’s U.S. Economic Indicators of Interest:

Monday Labor Markets Conditions Index
Tuesday RedBook Retail Sales

US Productivity and Costs

Wholesale Trade

Wednesday Treasury Budget Statement
Thursday Weekly Jobless Claims
Import and Export Prices
Friday Retail Sales

Producer Price Index

Business Inventories

Consumer Sentiment

 

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