Volatility Continues This Week

The markets continued to remain volatile this week, as a slowing Chinese economy once again weighed on global equities. On Tuesday, Chinese manufacturing statistics were released and showed a reading of 47.30. As a reminder, readings below 50 indicate contraction. This reading represents the sixth straight month of factory activity contracting. The Chinese government’s devaluation of their currency was supposed to jump-start manufacturing, as goods produced in China will appear cheaper, but there is a lag on when this will begin.

The Shanghai and Hong Kong stock markets were closed yesterday for a national holiday, offering a little relief to the markets that seem focused on China. The Shanghai market was also closed today as well. These markets were closed in observance of the 70th anniversary of the end of World War II. Beijing declared the day a national holiday, with celebrations and parades held throughout the country, and factories were even closed to reduce pollution during the parade. Perhaps as a signal to the rest of the world on the strength of the Chinese economy, the government went “all out” in its celebration. Special emphasis was put on the Japanese surrender, as the official name of the holiday was “Commemoration of Seventieth Anniversary of Victory of Chinese People’s Resistance against Japanese Aggression and World Anti-Fascist War.”

Jobs Numbers Weigh on Market:

The Labor Department released today that the U.S. added 173,000 jobs in August. This was below the average economist estimate of 217,000. The unemployment rate dropped to 5.1%, lower than the 5.2% estimates and is now the lowest unemployment rate since 2008. The growth in August came from health-care, financial, and social assistance sectors. Manufacturing lost around 17,000 jobs in August. The market sold off today, though faster than would be expected from this data alone, especially considering the August jobs numbers have a history of being revised upwards by a strong amount. The sell-off is likely attributed to fears that the data is “good enough” to keep the FOMC’s rate hike on the table for September.

Fed Funds Futures:

One way to gauge the market sentiment on the Federal Open Market Committee’s (FOMC) pending rate hike is to look at the Fed funds futures contracts. The Fed futures contracts are derivative contracts that trade on the Chicago Board of Trade. The contracts are mostly used by banks and hedge funds to hedge against unexpected changes in short-term interest rates. They can also be by speculators to bet on when the rate hike will take place. Just like with sports betting, following the money indicates where the sentiment of the market is in regard to rate changes. Earlier this week, the pricing of the various Fed funds futures contracts were putting the “odds” of a September rate hike at 38%, up from 25% last week. The “odds” of a hike by December (meaning any time before or in December) sits at 60%. The pricing of these contracts shows that it is increasingly likely that we will see a rate hike in 2015, but there is still a decent chance the Fed may hold off on raising rates until 2016. But based on comments from Fed Presidents, it appears very unlikely to us that they will hold off that long, as many have said they are looking towards a 2015 rate hike. Barring any extreme economic changes, the Fed would appear a bit weak if they don’t follow through with what they have been saying they are going to do for some time now.

Paradigm Office Closed Monday:

As a reminder, the markets are closed on Monday in observance of the Labor Day holiday. The Paradigm offices will also be closed.