Over the summer volatility hit lows in the 10’s, but over the last several weeks volatility has started to make a resurgence. On the surface it does not seem like good news, however, volatility averages are over 20 and this means we are reverting back towards norms. That could be good news in the long run. Here are the things that caused the uptick in volatility.
Domestically, Conference Board Consumer Confidence came out dramatically lower at 86, down from 93.4; its highest level since October 2007[1]. The consumer drives two-thirds of GDP and a weak consumer spells weak GDP. The reality is one reading is not a trend and 86 in and of itself is not a bad reading.
Personal Consumption Expenditures, the preferred measure for inflation by the Federal Reserve Board (FRB), came out at 1.5% year over year. This figure is well below their mandate of 2%. This should calm concerns about interest rates being increased sooner than expected. Between an elevated under-employment rate and sub 2% inflation, rate increases should continue on the FRB’s current forward guidance.
At the end of the week unemployment surprised investors by falling to 5.9% in September from 6.1% in August. In recent months when unemployment surprised in this fashion the market would head south over of concerns that the FRB may raise rates sooner than anticipated as the economy may be mending quicker than anticipated. This time investors took it for what it was, positive data on the economy and the market surged on Friday. It probably helped that some bad news was mixed in there as the participation rate fell by .1%.
Internationally
European PMI data released with mixed findings. Manufacturing PMI for both Spain and Italy beat expectations while France met expectations. The disappointing news came out of Germany as their Manufacturing PMI fell to 49.9 (Above 50 marks expansionary)[2].
Many in the market were disappointed that the European Central Bank (ECB) did not announce further economic accommodation. Current measures, such as the bond purchase program starting this month, will not show their impact until late 4th quarter, early 1st quarter. So additional measures at this stage are likely premature.
Manufacturing PMI for China came out flat, but above expectations. As a negative, recent Occupy Hong Kong protests had a major impact on investor discomfort last week.
Household spending and Industrial Production in Japan both fell, however Retail Sales came through strong at 1.2% year over year. The strength speaks to the Japanese consumer potentially showing strength.
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[1] www.mfs.com
[2] www.investing.com