Traders, already unsettled by the recent volatility in the stock market, are preparing for more fluctuations, starting with Thursday’s US jobless claims report.
According to Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy, the options market suggests the S&P 500 Index could swing by 1.2% in either direction, based on the pricing of at-the-money puts and calls. If this expectation holds until Wednesday’s close, it will mirror the implied moves for the upcoming consumer price index (CPI) release on August 14 and Nvidia Corp.’s earnings report on August 29.
“We are surprised by the rapid shift towards recession risks, especially with the Atlanta Fed GDP tracking at 2.9%. The jobless claims report this Thursday will be crucial,” Kaiser noted in a client note. He explained that the potential for significant swings reflects the high level of short-dated implied volatility, which likely indicates broader macroeconomic risk rather than specific event risks.
The weekly jobless claims figures, scheduled for 8:30 a.m. in Washington on Thursday, are seen as a critical indicator of labor market conditions. Last Friday’s jobs report showed the unemployment rate at its highest in almost three years, intensifying market scrutiny. The S&P 500 has experienced heightened volatility following a broad market selloff that nearly triggered a correction, defined as a 10% drop from its July 16 all-time high.
Although the S&P 500 has recovered some of its losses and is now about 6% below its peak, traders are speculating that a weakening labor market could push the Federal Reserve towards a substantial rate cut in September. However, midweek trading suggests some traders are hedging their bets on aggressive rate reductions this year.
Economists surveyed by Bloomberg predict that initial jobless claims will fall by 9,000 to 240,000 for the week ending August 3, following a significant rise the previous week due to annual auto-plant shutdowns and Hurricane Beryl’s impact, particularly in Texas.
If jobless claims increase again, it could raise concerns that the Fed may need to focus more on the employment aspect of its dual mandate, following its most aggressive monetary tightening in recent history aimed at combating inflation.
“Recession odds have risen as US economic data shows signs of slowing,” Kaiser added. “However, last week’s data was not sufficiently negative to justify the shift in market sentiment.”
Analysis and Market Impact
Investors should brace for potential market turbulence as key economic data releases approach. A significant change in jobless claims could signal broader economic trends, influencing market sentiment and the Federal Reserve’s policy decisions. The heightened volatility presents both risks and opportunities for traders and investors, particularly in sectors sensitive to economic shifts and interest rate changes.
