Bullish start to fourth quarter will get test in sluggish economic data

2-10-2017

Bullish start to fourth quarter will get test in sluggish economic data

Stocks start the fourth quarter on bullish footing in the coming week, with several major indices at all-time highs. "Historically, the first few days of a new month are strong. With everything closing at highs, and the stock market not having the bad September everyone expected, it does bode well for the week ahead," said Scott Redler, partner with T3Live.com. Hurricanes Harvey and Irma are expected to have muddied most economic reports in the coming week, giving a boost to car sales Tuesday but hurting Friday's September jobs report. Traders are also watching for warnings from companies that may have suffered hits to sales and profits, due to the storms. Besides a heavy calendar of economic news, Federal Reserve officials should dominate the headlines with about a dozen Fed speaker appearances. Fed Chair Janet Yellen gives introductory remarks at a banking conference Wednesday.

But market focus may shift to comments Tuesday and Thursday from Fed Gov. Jerome Powell, one of several candidates reported to be interviewed by President Donald Trump as a replacement for Yellen. The big data for the week is September's employment report, expected to show that less than 100,000 nonfarm payrolls were added, down sharply from 156,000 in August. "It's going to make the Fed's job even that much harder. All this data is being blown about by the storm impact. The jobs number is going to be a nonevent even if it's as weak as people are saying it is," said Win Thin, senior currency strategist at Brown Brothers Harriman. Vehicle sales, reported Tuesday, are expected to bounce back from a recently slower pace as residents of areas hit by wind and floods replace damaged cars and pickup trucks. "Recognizing that the data is going to be very choppy and noisy in the interim, and as a result of that it's going to be really hard to get clear signals," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch. "Our economists are expecting 17.6 million (annualized vehicle) sales, which is an increase from the prior 16 million."

Stocks finished the end of the third quarter with solid gains, and the S&P 500, Nasdaq and Russell 2000 were at all-time highs. The S&P rose to 2,518, up 0.7 percent for the week and a 3.9 percent gain for the quarter. Nasdaq was up 5.8 percent for the quarter to 6,495, and the Russell was up 5.3 percent for the quarter at 1,491. The Dow was up 4.9 percent for the quarter but off its high at 22,400. Strategists say the fourth quarter could also be bullish for stocks, which defied all expectations for a correction during the late summer. The Republican tax plan could keep the market buoyed, though some analysts say if there is disagreement over the plan, it could trigger a  slight pullback. "Earnings season will start in the week after, and that's when things should get a little more volatile. We had a broad-based rally that had leadership from banks, small-caps and even tech that got beaten up had a potent rebound," said Redler. "There's not really too many holes in the tape for now." Bond yields edged higher in the final days of the third quarter, but the 10-year Treasury note, yielding 2.33 percent, was only slightly higher than the 2.30 percent it was at on June 30.

Michael Schumacher, director of rate strategy at Wells Fargo, is among those who say the Treasury market may have hit a turning point toward higher yields in the past week, as the Fed re-emphasized plans to hike interest rates and the much-anticipated tax plan was unveiled. Schumacher said he will now be watching the Fed speakers because the economic data is too murky due to the hurricanes. "At least until December, the data is a mess. I think you listen more to the policymakers and focus less on the data. ... If you see fine-tuning of the reading the Fed wants to give the markets, I would guess it's somewhat hawkish," he said.