The S&P 500 is singing the Yellen Blues – focus on NFP

Since the Brexit decision, the S&P 500 remains in a state of lethargy.


The stock price movements have never been so flat in the months of July and August measured by the intraday volatility between the day’s high and low since the year 2011. While in the years 2011 – 2015 the index was hovering on average just around 1,2 % daily, this value was just 0,6% in 2016. The volatility index (VIX) that reflects the implied volatility of S&P 500 options is currently down to its lowest level of the year.

The reason for this is the ever growing market’s dependence on the FED. While the market participants were captivated by Jackson Hole last week and trading came to a complete halt, this week it is about the employment figures (NFP) that are awaited on Friday in the USA. The reason for this provided Janet Yellen herself. Her statement that there is a strong case for an interest rate hike, but that it will still depend on further reports, especially on the labor market, resulted in a re-stiffening of the S&P 500. So the market expects now that the employment figures (NFP) will determine the US’s (interest rate) future.

Three scenarios for the NFP employment figures

1) The NFP figures much in line with expectations. In such a case, the market would continue to speculate about the timing of a rate hike. The S&P might continue to rise slowly as the probability of a quick second rate increase would be low.

2) The NFP figures much stronger than expected. In such a case, a rate hike in September would be more likely (currently at 34%) and the market might experience another rate hike towards the end of this year or the beginning of the next year. The S&P would fall in value.

3) The NFP figures much weaker than expected. In such a case, a rate hike would be rather unlikely this year and the S&P would quickly rise to a new record high.

In any event, we should experience greater S&P swings and the VIX might pick up quickly.

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