For the mid-week ending August 6, 2015, the markets have remained in a narrow range awaiting each piece of news to determine the probability of a rate hike in September. In other news: the first GOP debate with winners and losers; jobless claims suggesting labor market tightening; and, food prices at a 6-year low.
Over the last five weeks the S&P 500 has remained within a 100-point range as each bit of news is factored into determining the odds of an interest rate hike in September by the Fed. Currently the odds are placed at 52 percent. The latest news impacting the odds have been: hawkish comments by Fed Bank of Atlanta President Dennis Lockhart; and, a strong report on U.S. service sector growth. The next big economic news item that will impact the odds are the jobs report and unemployment rate due Friday morning. The next FOMC meeting announcement, in September, will determine if a rate hike will be initiated.
The first GOP debate occurred Thursday night, lasting 90 minutes. Hosted by Fox News with a trio of moderators (Bret Baier, Chris Wallace, and Megyn Kelly), the debate turned out to be quite entertaining, especially with Donald Trump present. According to one CNBC contributor, here are the winners and losers. Winners: John Kasich (Ohio Governor) who offered a compassionate position with regard to expanding Medicaid and an acceptance of gay marriage; and, Marco Rubio (Florida senator) who came across as the adult in the room with clear and concise answers. Losers: Jeb Bush (former Florida Governor) who played it safe when fielding questions; and, Ben Carson (neurosurgeon) who had little presence throughout the debate till the very end. Donald Trump, who is looked at separately, delivered what was expected and remains a strong contender (and probably the reason most people listened to the debate).
Initial jobless claims edged up while coming in below expectations. The lower-than-expected number of applications filed last week for unemployment benefits suggests a continuation of labor market tightening. Initial claims increased only 3,000 to a seasonally adjusted 270,000 (273,000 was expected); this represents 22 consecutive weekly claims below 300,000. To smooth out the volatile weekly report, a four-week moving average provides a clearer picture of labor trends. The four-week moving average dropped 6,500 to 268,250 last week. The number of people still receiving benefits (after the first week of aid) dropped 14,000 to 2.26 million.
Food prices hit their lowest level in six years, since September 2009. The primary cause of low prices is due to high supplies of milk in Europe, high supplies of soy in South East Asia, and high supplies of palm oil in South America. The food price index (Food and Agriculture Organization of the U.N.) drop -19.4 percent from last year to 164.6 points. The U.N. reported the change in prices from June as follow: meat prices remained unchanged; dairy prices dropped -7.2 percent; and, vegetable oil prices dropped -5.5 percent. A contributing factor is the lower import demand from China, the Middle East, and North Africa.
If you’re trading options, it is suggested trading Put Credit spreads for Friday of next week at 2 standard deviations or greater. Expect the price of the SPX to fall within 2009 and 2151 (2 standard deviations) by this Friday.
For more information about options, see the ‘Suggested Links’ below.