Traders whipsawed by the stock market’s gyrations are bracing for more bouts of volatility in the coming sessions, starting with Thursday’s report on US jobless claims.
The options market is implying the S&P 500 Index will move 1.2% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser, Citigroup Inc’s head of US equity trading strategy. Should that pricing remain in place by Wednesday’s close, it would be in line with the implied move for Aug 14 — the next reading on consumer prices — and Aug 29, the day after Nvidia Corp’s earnings report.
“We remain surprised by the fast embrace of recession risks with the Atlanta Fed GDP tracking 2.9% and claims this Thursday will be very important,” Kaiser wrote in a note to clients. He said the potential for big swings “also reflects the elevated level of short-dated implied volatility, so likely isn’t pricing explicit event risk as much as macro risk dynamics.”
Traders are looking to the weekly jobless claims figures, due at 8.30 am in Washington on Thursday, for clues as to whether the labour market is weakening further after Friday’s jobs report showed that the unemployment rate rose to an almost three-year high in July.
Volatility is already at a heightened level following a broad market selloff that briefly pushed the S&P 500 on the brink of a correction, or a nearly 10% drop from its July 16 all-time closing high.
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While the S&P 500 has since recovered some of its losses and currently sits about 6% away from its peak, traders are betting a weakening labour market will put the Federal Reserve solidly on a path to cut interest rates in September by almost a half-point, though traders midweek appear to be cashing in some of those futures and options bets for aggressive reductions this year.
After rising by the most in nearly a year, initial claims are forecast to fall by 9,000 to 240,000 in the week ended Aug 3, according to a Bloomberg survey of economists. Most of the increase the prior week was tied to annual auto-plant shutdowns and Hurricane Beryl, with claims elevated in Texas — the state that bore the brunt of the first major hurricane of the season.
If there is another move higher though, that may revive concerns that the Fed needs to shift to worrying about the employment part of its dual mandate following the most disruptive monetary tightening campaign in recent memory to battle inflation.
“Recession odds are higher as US economic data slows,” Kaiser added. “But the information received last week did not seem negative enough to justify the change in sentiment.”
