What an eventful week it has been for the financial markets. The ADP employment change report initially disappointed with a significant miss, but the mood was quickly lifted on Friday as the government’s Non-Farm Payroll (NFP) data delivered a substantial beat. With the aid of this positive news, the market managed to close the week on a slightly positive note, with the S&P 500 ($SPX) (SPY) gaining around 0.5%. However, the energy sector faced a rough week as oil prices plummeted by nearly 9%, causing many energy-related stocks to follow suit. The hope now is that this decline in oil prices might eventually lead to more favorable energy prices.
Looking ahead, this week promises several significant events to keep an eye on, including the Producer Price Index (PPI), Consumer Price Index (CPI), FOMC Minutes, and more. Here are five important developments to watch in the financial markets this week:
1. Bank Holiday
On Monday, both US and Canadian banks will be closed in observance of Columbus Day and Thanksgiving Day, respectively. While this holiday will impact commercial and personal banking operations, the financial markets will continue to operate on their regular schedule. However, it’s worth noting that trading volumes in futures, stocks, and options might be affected on Monday.
2. FOMC Minutes
The release of meeting minutes from the most recent Federal Open Market Committee (FOMC) rate announcement tends to generate market volatility. Although the rate decision itself is already known, investors closely analyze the minutes for insights and hints about future rate decisions. Federal Reserve Chair Jerome Powell has hinted at the possibility of another interest rate hike later this year, making these minutes even more crucial for investors seeking clarity on timing and magnitude.
3. Producer Price Index (PPI)
PPI measures the change in the prices of finished goods producers sell. Given the persistent inflation concerns in recent years, a negative PPI reading could be received positively by the market. Recent PPI reports have consistently exceeded expectations, raising questions about the Fed’s ability to control inflation. Since this report is released before the market opens, the initial volatility it generates is likely to subside by the opening bell, but it could set the tone for the day.
4. Consumer Price Index (CPI)
CPI also measures inflation but from the consumer’s perspective. If PPI shows signs of inflationary pressure, CPI will follow suit. With the impressive NFP report from the previous week, the Federal Reserve is likely to pay close attention to these inflation metrics as they’ve already signaled their intent for another interest rate hike this year. If the economy continues to demonstrate strength, even if it’s largely on paper, it might compel the Fed to pursue a more aggressive tightening path in the coming months. On an intraday basis, CPI, like PPI, could set the market’s tone for the day.
5. Bond Yields
On a broader scale, bond yields could take center stage in the markets in the weeks and months ahead. As interest rates continue to rise, the cost of servicing both private and public debt will increase, particularly as lower-rate bonds are replaced with higher-rate ones. Additionally, many investors may seek to shift from longer-dated bonds to those with shorter maturities offering higher yields, and potentially causing disruptions in the bond markets. Historically, such developments in the bond market have correlated with movements in equity markets, although nothing in trading is certain.
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