“I have become convinced…that the forces at work in a reasonable horizon, once these transitory influences have passed, will give us the price pressures that move us to our target.” – Fed’s Dennis Lockhart
This week opened on the heels of a weak close last Friday and showed initial selling in early globex trading down to 2064.25. Since then the market has rallied on low volume – mostly chop up to 2110.25, 36 handles from the weekly low – but has stalled out there, with the following two days each making a lower high and a lower low. The 2100 pivot we wrote about so much this year maintains its personality, driving price up to it, then once there, the volume dries up, keeping it trading on both sides without any real traction either way. Earlier in the year the tendency was that after a few sessions of chop around 2100 to sell 40-50 handles, the market would regroup and make a run back to the 2100 magnet.
For some. there seems to be a slight sense of urgency heading into the October NFP after misses both in August & September that were fairly noticeable. However, lost in all the noise at the time was the fact that on a historical basis, those two months have a clear trend of missing on the initial release – even missing borderline significantly; but those two months have a tendency to be adjusted higher over the next couple months. With the consensus now between 180-185K for October NFP, Citi this week put out a note projecting 200K+ in growth. It is worth noting is that they have been right on recently, especially if their projections are outside the range of most bank forecasts. Interestingly, Citi, along with Westpac, anticipates backward revisions from the prior two months; and as much as October’s number is significant, the prior revisions will also be an indication going forward, after what seemed to some to be significant consecutive misses. The question is, how much will those revisions do to revert the prior month’s closer to the estimates?
From Citi’s Note:
Last month we put out a piece explaining the tendency for poor initial prints (not final) for NFP in September periods suggesting that a sub 150k number was very likely. We got lucky, and of course as a consequence we are “pushing our luck” by making a few observations this month that suggest:
- a good chance of an upward revision of the Sept number to around +186k
- An October number just above +200k
Citi continues: If lightning strikes twice and we are correct, we suspect the market will really begin to believe that a December move by the Fed is a very likely outcome.
Following this, yesterday, Goldman Sachs put out a note moving from their original forecast of +175K altering that to +190K as the trend seems to be bullish on this number.
How much of this matters?
Many seem to think that the FED is holding their breath ahead of every economic release between now and the December meeting. It seems like such a shallow view to put so much weight on the most recent quarter, especially since Fed members have seemed to reiterate that they are looking at the longer term big picture and projections, rather than any particular single month’s indicator. There have been nearly 70 months of job growth, and Fed speakers have suggested that unemployment is at a norm; do we really think that after these years of growth with the unemployment rate near 5% that this month’s release is going to change the Fed’s minds, whether it be a miss of 150K or a beat of 200K.
By and large, aside from a couple strong “doves”, the decision has already been made to hike; it’s not the if, or the why, or even the how; the question is the WHEN. When can they do this without surprising the market and sending it into turmoil, and without being blamed for missing or ignoring economic indicators.
Two problems :
1.Economic Indicators
GDP, non-farm payrolls, retails sales, a downward revised earnings season as well as other releases and factors have created a sense of pessimism in recent weeks, to say the least. Perhaps today’s release will be vital indicator of how the Fed will respond, judging by their comments below. Also, “hawks” have in their favor this week’s better-than-expected ISM non-manufacturing data, which led to an upward shift in the Atlanta Fed GDP tracker for the 4th quarter from 1.9% to 2.3%, and prompted other banks to revise upward, including:
- Goldman Sachs at 2.5%
- Morgan Stanley at 2.1%
- JP Morgan at 2.5%
This is better than the 1.4% for 3Q released last week.
- Preparing The Market
The biggest fear of any financial market is uncertainty. The rudest reaction comes from a surprise, and the Fed wants the initial hike to be absorbed by the market with as little volatility as possible. Given all the strenuous care, attention and coddling throughout this entire year,which were in order to gently lay out the expectations for a hike and then to begin to focus on these months at hand, we should expect nothing less from them than to make the picture ever more clear, shouldn’t we?
We have seen more Fed speak then ever; this week Chair Janet Yellen really started to drive in the hawkish expectations, which seemed to be reiterated by President Lockhart as well. If their mission is to prepare the market, they are doing what would be required initially to prepare for a hike soon, as in the possibility for December.
Lockhart’s comments this week:
- US central bank intended to shift market expectations of interest rate liftoff with last policy statement; they were successful
- Expects possibilty for a rate hike will continue to strengthen between now and Fed’s December meeting
- Case for liftoff will continue to firm up
- Fed liftoff will soon be appropriate.
- Expects risk that faced FOMC in September/ October to subside
Yellen’s comments this week:
- FOMC thought it could be appropriate to move in December
- No decision made on December move; data to be monitored
- December would be live meeting, if data supports move
- Fed expects economy to justify gradual tightening pace
Earlier this week the chances of a move in Dec were seen at 50%; and after Yellen, that has shifted up to 58%, according to the Fed funds rate futures. Whether they raise or not in December, the market is sitting up and paying more attention than ever.
One matter of concern when considering a potential December rate hike is the fact that the last few meetings, there has been only a single dissenting vote, that being from Richmond’s Jeffrey Lacker. There are 12 voting members, which would seem to suggest they need a vote of 7 to raise rates; so this would mean that there will need to be 6 swings votes or roughly half of the entire committee, something would seem to be quite optimistic for December.
In Asia 8 out of 11 markets closed lower (Shanghai Comp. +1.91%), and in Europe 8 out of 11 markets are trading lower (DAX -.%).22 Today’s economic calendar includes St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy, in St. Louis, Employment Situation Consumer Credit, Federal Reserve Gov. Lael Brainard on panel discussing unconventional monetary policy, at IMF conference in Washington. and earnings from CIGNA Corp (CI) and others.
Our View: How today’s number will affect the markets is anybody’s guess, it could be digesting in multiple ways ,but we do believe that there are some downside sell stops and that this is the most logical path of least resistance to run the markets. 7 of 10 months this year NFP day has closed lower, last month the NFP miss initially took the S&P futures 30+ handles lower before rallying 50+ handles. Something worth noting is that there is an opportunity for Fed officials to provide their reaction to the payrolls report, with Bullard, Brainard and Williams all scheduled to speak after the NFP release. MrTopStep’s call is that the downside is more vulnerable, prepare for a day of profit taking and remember a trending Friday can be one of the most difficult times to try to counter-trade a market and that the initial reaction to the NFP release is usually the wrong direction.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed lower : Shanghai Comp. +1.91%, Hang Seng -.80%, Nikkei +.78%In Asia of 11 markets closed
- In Europe 8 out of 11 markets are trading lower : CAC -.87%, DAX -.22%, FTSE -.06% at 6:00am CT
- Fair Value: S&P -5.17 , NASDAQ -6.01 , Dow -64.33
- Total Volume: 1.53mil ESZ and 6.9k SPZ
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