Stocks ended the week in the red, US GDP was upgraded to a 3.9% annualised rate, and Janet Yellen put a 2015 rate hike back on the table.
That’s left traders a little confused about the outlook for interest rates, bonds, stocks, currencies, and commodities and it could set up another uncomfortable week of volatility with the release of arguably the two most important data releases for Australia and the US for the next month on Friday.
Australia sees the release of retail sales while non-farm payrolls are out in the US. Further updates on Chinese PMI’s are also super important Thursday.
In the run up though markets will have plenty of catalysts for trade as the data starts to crank up at the beginning of the new month in Australia and around the globe.
Annette Beacher, TD Securities head of Asia Pacific macro strategy, summed up where traders heads are at nicely in a note Friday:
Australian markets this week continued the Fed-led roller-coaster ride, with bond yields oscillating daily, but nothing directional. AUD sagged via the Fed pause being blamed on global weakness and volatility, and compounded by a nasty 47.0 (mkt 47.5) in the Caixin flash PMI mid-week. Iron ore is still holding up at $US55/t, a dove-defying performance. These oscillations were offshore driven given the dearth of domestic data and events, aside from new PM Turnbull setting up a fresh Cabinet and planning a better future for Australia.
In a broader sense the fact that stock, and other, markets have continued to trade through big ranges is both a result of increased uncertainty about the Fed, global growth and valuations and a cause for further concern. That’s as true here in Australia as it is in the bellwether global stock market, the S&P 500.
Most commentators look at the CBOE VIX index as a measure of market volatility. You’ll read endless stories when it spikes. But the reality is that the way traders like me look at volatility is not the daily gyrations of the global “fear” index but rather some sort of average of the daily price range through which markets move. I like 20 days but others use 14. The important thing is it’s these ranges which help scale position sizes and adjust stops to account for market volatility.
Boiling it down more volatility equals smaller positions held with less conviction. So, as you can see in the chart below with intra-day ranges, daily volatility, at extreme levels, the volatility continues to feed on itself. That’s what is making markets, traders, of all stripes – forex, bond, commodity and stocks – so skittish at the moment.
Markets, from oil, to the Aussie dollar, ASX and S&P, Nasdaq, FTSE and DAX have so far held recent lows. That’s important because so far the price action is entirely consistent with the market trying to stabilise after August’s earthquake. But the increased volatility also increases the chance of a downside break which is important this week with so much important data out in Australia, China and the US.
In the run up to retail sales in Australia at the end of the week there is nothing out in Australia on Monday. Tuesday sees the release of the Weekly ANZ-Roy Morgan consumer confidence survey. Last week saw a record bounce in confidence after the elevation of Malcolm Turnbull to the prime ministership and importantly respondents’ outlook for the future brightened materially. This is a good sign for the economy if confidence can stay elevated.
On Wednesday we get the release of the RBA’s credit aggregates. The NAB’s economics team reckons we could see a bit of a transition from the rampant housing growth and moribund business growth to something favouring stronger business credit growth. That, they say, “could be expected given the pick-up in business conditions in August.” Building approvals are also out on Wednesday with the market expecting a fall of 2% in August.
On Thursday we get the release of the AiG PMI, CoreLogic RP Data House prices, Job vacancies and RBA Commodity prices.
Friday sees the release of the big one, retail sales. The importance of sales is that the release last month of July’s unexpectedly weak print of -0.1% for July came a day after the weak 0.2% print for Q2 GDP and seemed to confirm that the economy entered the third quarter in a still weak state. The market is expecting a bounce back in August sales with a print of 0.4%. The NAB is only looking for a rise of 0.3% but said in their “What to Watch” publication this week that:
Business conditions in the retail industry have not only continued to make some gains but stepped up another notch in August. While this may not map one-to-one with the ABS series, it’s a reminder that retailers are reporting somewhat better trading conditions overall, notwithstanding what the monthly data point to.
Offshore it’s a big week as well with the release of the Japanese coincident and leading indexes. The IMF World Economic Outlook – Analytical Chapters are out on Monday night along with PCE spending/ deflators, Dallas Fed manufacturing and pending home sales in the US.
Tuesday sees Import prices and CPI data released in Germany, mortgage approvals in the UK, EU business climate and economic sentiment. Case Shiller house prices and the Redbook index are out in the US.
Wednesday sees the release of retail sales, industrial production, housing starts and construction in Japan. Retail sales are out Wednesday night in Germany while in the UK GDP is out. EU CPI is out, and in teh run up to Friday’s non-farms the ADP employment report is out in the US.
Thursday is a big day. The start of the month sees the release of PMI’s around the globe with the Chinese Caixin and NBS releases due. In Japan the tankan is out and in Europe we see the release of the raft of Markit PMI’s in Europe and the America’s. Also out is Challenger job cuts and initial jobless claims in the US.
China has a day off Friday as it starts its Golden week holidays while in Europe we see the release of PPI. But the big highlight is non-farm payrolls. The market is forecasting a rise in non-farms of 203,000 and the unemployment rate to stay at 5.1%.
Westpac’s economics team is expecting a slightly lower outcome of 190,000. Writing in his Australia and New Zealand Weekly Bill Evans said:
The pace of nonfarm payrolls growth has slowed of late. Yet including revisions, growth is still in excess of 200k per month – 217k in Aug and a 212k average for 2015. At 1.8% annualised, employment continues to outpace growth in the population (1.2%) and the labour force (0.9%). Sep is likely to see this trend persist: a forecast 190k gain, with upside risk from further revisions.
It’s going to be a huge week.
Here’s the NAB’s excellent diary of all the key data and events.
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