For the week ending November 6, 2015, both the Dow and the S&P 500 realized solid gains as despite the increased odds of a December rate hike by the Fed. For this past week, the Dow gained 1.40 percent; the S&P 500 gained 0.95 percent. In other news: the jobs report increases the probability of a December rate hike; auto sales indicate a record year; and, Saudi Arabia won’t limit oil output. Below is a recap of the markets for each day of the week.
The markets were up on Monday on mixed economic news: solid gains in construction spending; manufacturing continues to struggle due to weak exports; new orders are up; and, Chinese and European PMIs show strength. The Dow rose 0.9 percent to 17,828; the S&P 500 rose 1.19 percent to 2,104.
On Tuesday, the markets were up again on strong vehicle sales indicating plenty of strength in the domestic market. Oil rose $2 to $48. The Dow rose 0.60 percent to 17,926; the S&P 500 rose 0.27 percent to 2,110.
The markets dropped on Wednesday despite a strong ISM non-manufacturing report indicating continued growth in the services sector. Oil dropped $1.50 to $46.50. The Dow dropped -0.30 percent to 17,867; the S&P 500 dropped -0.35 percent to 2,102.
The markets dropped on Thursday as initial jobless claims rose higher than expected, and the consumer comfort index dropped. Oil dropped $1.50 to $45. The Dow dropped fractionally to 17,8630; the S&P 500 dropped fractionally to 2,100.
On Friday, the markets were mixed in reaction to a very strong jobs report and a drop in the unemployment rate, both of which increased the probability of a December rate hike by the Fed. The Dow rose 0.30 percent to 17,910; the S&P 500 dropped fractionally to 2,099.
The huge increase in non-farm jobs from the employment report on Friday has increased the probability of a Fed rate hike in December to 70 percent (from 50 percent). According to the Bureau of Labor Statistics, the labor market added an incredibly high 271,000 jobs in October (190,000 expected), which is the single best monthly growth in jobs this year. Fed Chair Janet Yellen had stated earlier on Wednesday that a potential interest rate hike in December was very much “live”; with this new jobs number, it is now likely if there are no hiccups from now till the next FOMC meeting.
U.S. auto sales jumped in October to 18.2 million annual rate (17.7 million expected), a twelve-year high; domestic sales were 14.5 million. Automakers employed various incentives to offset the slowdown that usually occurs in October and keep the September momentum going; sales incentives in October increased 14 percent to $3,104 per vehicle. General Motors said on Tuesday that the industry is “on track to establish a record calendar year”.
Saudi Arabia will not cut oil production to boost prices; thus, oil prices will remain low. Saudi Arabia, the largest exporter of oil, is determined to maintain its policy of pumping enough oil to protect its global market share despite the financial pain to its economy. Last November the industry was hit when OPEC decided to abandon its policy of stabilizing prices by cutting production. The lead to a collapse in oil prices from a high of $115 per barrel to $50 per barrel. The expectation is that the increase in demand for oil (due to low prices) will bring prices up to $70-$80 per barrel in the next two years. The fall in Saudi Arabia’s revenues has led to a deficit of 20 percent of GDP; the government is dipping into its massive reserves to balance its budget.
The bottom line: the expectation is the FOMC will increase rates in December if the November employment report remains strong and global markets do not implode. Globally, the Fed and the BoE both look to increase rates while the ECB is looking to do the opposite: increase stimulus to combat its lack of inflation and slow growth.
The focus next week in the U.S. will be on prices (import and export price report; producer prices), jobs (initial jobless claims; JOLTS), and sales (retail sales). Globally, in focus next week will be the Eurozone GDP which could impact the ECB’s decision to increase stimulus. In addition, the focus will be on the following: UK (Labor Market Report); eurozone (Industrial Production, Merchandise Trade, Gross Domestic Product); Germany (Merchandise Trade, Gross Domestic Product); China (Consumer Price Index, Producer Price Index, Industrial Production, Retail Sales); and Japan (Producer Price Index, Private Machine Orders).
Year-to-date the markets are up: Dow +0.5%; S&P500 +2.0%; Nasdaq +8.7%.
The Markets for the past week were: DJIA up 1.4%; S&P500 up 1.0%; Nasdaq COMP up 1.8%.
Commodities (ETFs) for the past week were: Gold (GLD) down -4.76%; Silver (SLV) down -4.86%; Oil (OIH) up 3.21%; Dollar (UUP) up 2.30%; 30-year Bonds (TYX) rose 16 basis points to 3.09%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 14.33% reflecting the continued rally of the markets, despite the higher potential for a December rate hike.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate:
o Monday – nothing
o Tuesday – Import and Export Prices
o Wednesday – nothing (banks closed for Veterans Day)
o Thursday – Weekly Jobless Claims, JOLTS, EIA Petroleum Status Report, Treasury Budget
o Friday – PPI-FD, Retail Sales, Business Inventories, Consumer Sentiment
If you’re trading options, it is suggested trading Put Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 2026 and 2175 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.