Light Volume Could Mean Quicker Market Moves As Hurricane, North Korea Still In Focus

Despite a massive hurricane and continued noise out of North Korea, the S&P 500 Index (SPX) has a chance Wednesday to post its fourth consecutive day of gains. Be aware, however, that volume looks like it could stay light, posing the risk of quick moves. As on any low-volume day, discipline is key.

On the data front, Q2 GDP rose to 3%, the government said early Wednesday in its second estimate for the quarter. That’s up from the previous 2.6% estimate and reflects strong consumer spending growth, a potentially positive sign for the stock market. Sometimes a vigorous GDP number can underpin stock prices, because it’s a snapshot of the entire economy’s health.

Yesterday was an impressive session as the market rallied back from fears of North Korean missiles. It reinforced how all the noise out of Washington, D.C., doesn’t mean much, but when you get a global geopolitical crisis, the market pays attention very quickly and you see what actually matters. The SPX is up three days in a row, though gains have been rather light.

Hurricane Harvey remains front and center early Wednesday, posing a bit of a wildcard for the economy and the markets as we move forward. And North Korea isn’t going away. It’s likely to rear its ugly head time after time.

One hurricane-related question is how long much of the Texas oil industry can remain offline. As one energy analyst told the financial media today, it’s a lot easier to get oil production back to normal than it is to re-start a gasoline refinery after a long break. Gas prices have soared to two-year highs, and if that lasts a while it could start to have an impact on other parts of the economy. Keep an eye on the transport sector for any possible effects, though most companies in that industry tend to hedge their energy purchases.

The financial sector also bears watching. Insurance company stocks initially fell on the hurricane news and then clawed back slightly on Tuesday. This might remain a volatile part of the market as investors fear a huge surge in claims from what some experts say might be the costliest storm in U.S. history. 

On Tuesday, the Dow Jones Industrial Average ($DJI) initially fell sharply as people worried about North Korea’s missile launch, then clawed back to finish higher for the day as fears diminished. Still, it was a tough session for some sectors, including financials. Additionally, while safe havens gold and bonds retreated slightly, they’re not far off recent highs, and 10-year bond yields sunk at one point to their lowest levels since last November (see below).

On a positive note, some growth sectors like technology and industrials posted gains Tuesday. There doesn’t appear to be any wholesale flight to safety at the moment. On the other hand, that could change quickly if international tension dials back up. VIX, the market’s most closely watched measure of volatility, stormed up to 14 early Tuesday but finished below 12.

European and Asian stocks moved higher earlier Wednesday as fears of a North Korean crisis continued receding. One event that might calm things further is the scheduled end tomorrow of the 11-day joint military drill by the U.S. and South Korea.

GDP is the key number today, but don’t forget to start gearing up for what’s likely to be the most important data point of the week when payroll numbers for August come out Friday morning. A closely watched private industry payroll number that came out early Wednesday pointed toward strong jobs growth, but it’s the government’s report that counts. Estimates for jobs growth range from 170,000 to 190,000, down from 209,000 in July.

Earnings went down to the farm early Wednesday as Bob Evans Farms (BOBE) reported a quarter that surpassed analysts’ revenue expectations and met bottom-line estimates. Casual dining is a good sector to watch to get a sense of Americans’ willingness to open their wallets and eat out.

FIGURE 1: WHAT’S BEATING U.S. STOCKS THIS YEAR? The S&P 500 (SPX), represented by the purple line, is up a healthy 8% so far this year. But gold and the euro (blue line) have out-performed U.S. stocks, and both vaulted to new highs this week as investors sought safety in gold and bonds partly due to building geopolitical tension. The strength in bonds put pressure on the dollar vs. the euro. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Lower Yields Eyed for Possible Impact

North Korea tensions helped send bond prices spiking Tuesday, and that put the 10-year yield under 2.1% for the first time since last November. Should geopolitical fears continue, it’s not out of the question that the yield could test psychological support at the 2% mark or perhaps fall below. That’s a long way down from the 2.6% yields seen earlier this year, and some analysts had even been looking for a rally to 3%. That was long before saber rattling between the U.S. and North Korea sent many investors scurrying for risk protection. Lower bond yields can have a mixed impact on the stock market, depending on the sector you look at. They tend to be bearish for the financial sector, where banks often benefit from higher rates. On the other hand, lower yields can help dividend-paying stocks like telecom and utilities, as their dividends might start to look attractive compared with bond yields.

Stay Tuned for PCE Prices

One of the Fed’s most closely watched data benchmarks is due early Thursday as Personal Consumption Expenditure (PCE) prices for July hit the wires at 8:30 a.m. ET. Recall that in June, PCE inflation barely nudged, with the overall index flat and the core reading at 0.1%. From a year-over-year perspective, PCE prices were up 1.4%, down from a 1.5% rise in May. That report reinforced many investors’ beliefs that the Fed would be unlikely to raise rates in September, and now the odds of a September rate hike are virtually nil, according to CME Group futures. Thursday’s PCE price data could shape investors’ perspective as to whether the Fed might raise rates again at all this year. As of now, it doesn’t look like this report has much chance of changing the ongoing conversation about the mysterious case of the missing inflation. Analysts expect just 0.1% growth in the July headline number and 0.1% in core PCE price growth, as well, according to Briefing.com.

Ample Oil Supplies Could Blunt Harvey Effect

With oil rigs and refineries down due to Hurricane Harvey, there’s lots of talk about possible impact on the price of oil and gasoline. However, the overall supply situation remains ample. U.S. production reached 9.5 million barrels a day this month for the first time since mid-2015, putting it about one million barrels above the year-ago level. Sure, the hurricane could take a short-term bite out of that, with more than 300,000 barrels a day of capacity shut down in the Gulf of Mexico. But that’s where supplies come in. Total stockpiles stand at 463 million barrels, compared with 419 million barrels two years ago and just 320 million barrels a decade ago. Maybe that’s one reason crude oil futures fell to one-month lows below $46 a barrel on Tuesday, though anticipated lighter refinery demand due to the hurricane also played a major part.