10.10.2016
By John D'Antona

TRADING THE WEEK:  After Jobs Data, Market Keeps Ear to Ground

When certain people speak, some listen. When Federal Reserve speaks, everyone listens.

This week that will be the case as several Federal Reserve Governors will be talking about the economy and potentially giving hints to the future of U.S. interest rate policy. Traders said that this busy speaking week and late week economic data will likely set the course for trading in the fourth quarter.

Last week trading was muted as the September employment report took center stage. Trading volumes confirmed this as average volumes were checking in 15% to 20% below average. Lack of volatility is keeping the VIX index close to year-to-date lows.

“Last week on Wall Street was similar to running on a treadmill, a lot of work but in the end we found ourselves in roughly the same place,” said Larry Peruzzi, managing director of international trading at Mischler Financial Group. “We started the week with a positive reading in ISM Manufacturing on Monday followed by a weak Factory order reading on Wednesday which was offset by a positive revision to August durable goods orders.”

And the last Friday’s employment report hit the tape. September’s figures showed a gain of 156,000 while economists expected 176,000 jobs to be added in September, according to a late Reuters estimate.

“Friday closed out the week with the key takeaway was that with improving prospects employers are reporting facing a limited pool of qualified workers,” Peruzzi added. “That could mean we see some wage inflation and pressure in the coming months.”

And if there is a change of wage-push inflation, then the current market opinion polls that say 65% of economists surveyed expect the Fed to say on track to raise interest rates in December.

Looking ahead to this week, after what is expected to be slow start Monday as the U.S. celebrates the Columbus Day holiday, economic data will be back en vogue as Wednesday brings the release of the September 21 FOMC meeting minutes and Friday the first of the monthly inflation reports.

“We have been hearing the dissention on keeping rates unchanged has been growing.  It will be interesting to see those minutes,” Peruzzi said. “September’s Retail sales data on Thursday might shed some light on the mood of the consumer. This will be important number in helping set our Christmas sales estimates.”

Another trader at the NYSE said that Fed watchers will be busy with Governors Dudley and George peaking on Wednesday, while Harker and Kashkari are speaking on Thursday and culminating with Rosengren and then Chairman Yellen speaking at a Boston Fed conference on Friday.

Picking up on last week’s IPO theme, a few traders were still discussing the IPO pipeline as social media platform SnapChat is rumored to be considering an offering that could raise upwards of $25 billion dollars.

In terms of volume, U.S. equity exchanges averaged 6.89 billion shares per day for the week ended September 30, according to Bats Global Markets data. That’s up from an average of 6.72 billion shares in the week ending September 30.

In related market news, after one week in operation today Wall Street’s brokers reported nary a hiccup in the U.S. Securities and Exchange Commission’s Tick Pilot program. The pilot program is designed to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities.

”So far, we haven’t heard of any brokers or trading centers experiencing difficulties complying with the new rules – and our fingers remain crossed that this radio silence will continue,” said Andrew Upward, head of market structure at Weeden. “We weren’t expecting trouble on Day 1, no, although we didn’t peg the odds at zero either.”

Wendy Dailey, senior vice president of business development at Dallas-based Capis, told Markets Media that her firm had been working with its order management system provider, Fidessa, as well as trading venues to ensure compliance as well as a smooth transition with the Tick Size Pilot.

“At this point, we have not had any issues with the Tick Size Pilot,” Dailey said. “We feel that industry participants had plenty of time to prepare.  We are more concerned whether the implementation of wider spreads actually increases coverage and liquidity or just adds additional cost to the investor.”

However, today nickel-based increments will go live for another 95 Test Group 1 stocks and another 95 Test Group 2 stocks. And as the brokers reported, trouble could still come in the future as more and more stocks enter the Pilot program and in Test Group 3 – the group in which stocks are subject to a ‘Trade At’ proviso.

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

Monday US Holiday – Banks Closed

Markets Open

Tuesday Redbook Retail Sales

 

Wednesday FOMC Meeting minutes
Thursday Jobless Claims

Import/Export Prices

 

Friday

Producer Price Index

Retail Sales

Business Inventories

Consumer Sentiment

Janet Yellen Speech

 

Consumer Credit

 

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