All the tinder capable of supporting market flare-ups is piled at investors' feet as Wall Street enters the Independence Day holiday Thursday.
Consider this: The monthly employment report reliably makes traders nervous as a cat. Vacation-thinned market sessions can make for whippy index moves. Whenever major overseas economic news breaks when the U.S. is observing a holiday, pent-up responses build up for the next day’s opening bell. A slow-motion coup in Egypt is fueling a fear rally in the oil market.
And, these days, the Federal Reserve’s open expectation that better job-growth news will allow it to reduce its stimulus project raises the stakes for all economic-data releases.
All these elements add up to what could be an interesting day on Friday, when U.S. markets reopen for a full trading day following the July 4th holiday.
The numbers game
At 8:30 a.m. ET on Friday, nonfarm payrolls for June will be released, allowing traders who choose not to take a four-day summer weekend to respond to the numbers. The opening of trade will also come after a Thursday marked by policy meetings of both the European Central Bank and the Bank of England; any notable developments that come from across the pond could be factored into U.S. market activity on Friday.
It’s a rather odd arrangement: a single day’s trading sandwiched by a national holiday and a weekend. The last time this occurred was more than a decade ago, as the tech bust bear market was teasing and torturing investors. July 5, 2002, the Standard & Poor’s 500 shot up by 3.6%. Interestingly (and probably meaninglessly) the July 5, 2002, close proved the market’s high point for the next 11 months, at which time the mid-2000s bull market got rolling.
Chances are that any market response to the payrolls change – which is forecast to match May’s addition of 175,000 net new jobs – will be a reflex move near the market open, after which stock and bond markets will enter pre-weekend, thinly staffed torpor. Adam Warner, a veteran options trader and expert on how volatility is priced in derivatives markets, said Wednesday that there seemed to be no hints that traders were bracing for an outsized move.
And for all the concentrated attention on employment-report day by market mavens, since 2000, days when payrolls and unemployment rates are reported do not generally see greater intraday volatility than the average trading day.
This doesn’t mean, of course, that Friday won’t see a quicksilver move in bond yields and stock indexes as investors recalibrate their assumptions about the thrust behind the U.S. economic expansion and what it might mean for Fed easing.
Lowering the stakes
It appears that, in the past week or so, Fed emissaries have tried to lower the stakes attached to any single quantum of economic data as a driver of the timing and magnitude of the eventual slowing in Fed balance-sheet expansion. While the Fed’s plans are decisively “data dependent,” policy makers have signaled they believe growth and job prospects will improve, and now have a reasonably high threshold for reassessing that stance.
Fed governor Jeremy Stein last Friday quite pointedly said the Fed’s policy-setting committee “will give primary weight to the large stock of news that has accumulated since the inception of the program, and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting — as salient as these releases may appear to be to market participants.”
This means investors should firmly be in a mode of hoping for upbeat economic news that supports the Fed’s default growth scenario, rather than taking solace in soft data that could, in theory, keep monetary policy hyper-easy.
Barclays market strategist Barry Knapp this week has argued that the nonfarm jobs release has a greater shot at spurring a downside market reaction than a cheery one, mainly because Stein’s message above suggests the employment report would need to be dramatically, uncomfortably weak for investors to begin pricing in an easier, friendlier Fed.
In all, it’s probably a net positive that the S&P 500 has traded choppily just above the 1,600 mark, and 10-year Treasury yields have hovered right below 2.5% over the past week. Any dramatic moves ahead of the odd, one-day, jobs-data sweepstakes would probably represent an untrustworthy display of trader bravado and conjecture.