The flash crash of the British pound on Friday overshadowed the U.S.’s no.1 market moving economic indicator, the non-farm payrolls. As the pound plunged 6.1% in less than two minutes in early Asian trade, some investors recalled the flash crash of May 2010 that sent the Dow Jones Industrial Average 1000-points lower in a matter of minutes – in what seemed to be one of the most turbulent periods in the history of financial markets. Unlike the 2010 crash, this time the pound’s plunge did not spread over into other financial assets but this incident should serve as a wakeup call especially when we expect similar moves attributed to the computerized trading in today’s trading environment. We can now see that there have been changes in the algorithms as well as regulators are no longer stepping in.
U.S. earning season finally kicks off this week, with banks including JP Morgan, Citigroup and Wells Fargo all due to release their third quarter results. If S&P 500 companies reported a decline in earnings for Q3 it will be the sixth straight quarter of year-over-year drop and with forward price-to-earnings ratio sitting above 17, it will be hard to justify news highs on the index. Markets are expecting about a 1% decline in earnings from last year, but based on the typical upside surprises there’s a high probability that Q3 will mark the end of the profit recession. Although this might seem optimistic, a year-end rally in stocks requires more than just upside surprise in earnings, but also a positive guidance.
With markets pricing in a 65% possibility for a rate hike in December, minutes of September’s FOMC meeting on Wednesday will provide more insights on how the Fed is thinking. The jobs report on Friday didn’t change the odds for a December rate hike, but lowered November’s expectations from 15% to 8% according to CME’s fedwatch. The U.S. labor market in fact did disappoint with only 156,000 jobs added to the economy versus expectations of 172,000 and unemployment rate spiked higher to 5%. The weaker than expected figures are not enough to rule out a rate hike in December as it remains satisfactory and you can still debate that the rise in unemployment rate is due to the increase in the labor force participation and make it look as better news. However, with two more job reports until Decembers meeting many things could change.
Many of the Fed members are due to speak this week including Fed Chair Janet Yellen at the annual economic conference hosted by the Federal Reserve Bank of Boston. If they continued to express their satisfaction on the path of the U.S. economy this could lend additional support to the U.S. dollar which fell against the Yen on Friday for the first time in 9 sessions.
On the U.S. data front, we have to wait until Friday for tier one data releases. Retail sales will be a key figure to watch as consumer spending will be a major driver to U.S. third quarter GDP. Markets expect a 0.6% rebound in September from -0.3% drop a month earlier.