Extending Stock Market Surge May Hinge on Key Job Market Data

Can November echo the stock market’s chart-busting October? It was the best single-month performance for broad averages in four years for a market that hobbled out of a challenging summer. A repeat could be challenged by this week’s sprinkling of earnings releases and October jobs data—the closely watched granddaddy of economic reports that could shape Federal Reserve decision-making.

To set up for the latest job-market release, rewind to September hiring data. That report revealed a wide shortfall in payrolls that tipped the benchmark 10-year Treasury yield below 2% and triggered a reset of interest-rate expectations across financial markets. According to Labor Department stats, the U.S. economy created just 142,000 new jobs in September. The unemployment rate was unchanged at 5.1%, though more people dropped out of the labor force. The latest report will be released pre-bell on Friday morning (see the full economic release calendar below).

Payrolls: One for the Hawks?
Can October’s payroll reading return to a count north of 200K (or stronger), a hiring pace that economists deem more in line historically with this stage of the economic recovery? Hiring is a key metric for the Federal Reserve and the group’s most outspoken hawk, Richmond Fed’s Jeffrey Lacker, thinks much tighter hiring conditions are bubbling below the surface.

Lacker on Friday issued a statement explaining why, for the second time in a row, he dissented from his Federal Reserve buddies in calling for a rate hike. "My reasoning was based on my belief that with the steady growth in output and household spending that we have been observing—and expect to continue—the real (inflation adjusted) rate of interest should be higher than its current level of less than negative 1%," he said. "My assessment was also supported by labor markets that had tightened considerably and my confidence that inflation will return to our 2% objective after the temporary effects of low energy and import prices have passed."

Let’s see if Friday’s report backs his minority opinion or feeds the cautiousness among Fed doves.

As for financial markets, they’re again getting used to jabber for a 2015 rate hike. The CME Group’s FedWatch Tool, calculated based on pricing in the Fed funds futures market, shows traders are pricing in about a 50-50 shot for a rate hike in December according to market pricing on Friday. That’s up from the 35% odds priced in right after the Fed took a pass on an October rate change but issued a statement entertaining the thought of a December hike. Traders in this market see a 71% chance for a hike in March.

Sub-15 VIX
This heavy news week will play out against what have been relatively low volatility levels in the stock market as the major averages marched higher (figures 1 and 2). The CBOE Volatility Index (VIX), which tracks the implied volatility priced into SPX options, dropped some 36% in October.

Recall that VIX remained in the 20s for much of September after a turbulent August stirred anxiety levels on Wall Street. Since that time, the market’s so-called “fear gauge” has been in a steady descent and now probes two-month lows.

Earnings: TSLA, FB, DIS
The week’s earnings line-up lessens considerably from recent earnings-heavy trading sessions.

Of note, Tesla TSLA, the luxury electric car maker, reports its results on Tuesday. And Facebook FB continues what has been a mixed reporting period for social media stocks when it enters the earnings confessional on Wednesday.

Disney DIS, which could be a barometer of consumer health now and heading into the holidays, will issue earnings on Thursday.

Industry analysts are generally focused on commentary surrounding ESPN and any impact from cable “cord cutting” trends. DIS may also comment on its first amusement park in Mainland China, of particular importance as Wall Street assesses slowing Chinese demand. This earnings season has actually produce “upside China surprises” from Nike NKE, Apple AAPL, and others, whose China-impacted results weren’t as negative as Wall Street initially braced for. Will the same hold true for the House of Mouse?