Weekly Newsletter November 17th to November 21st
RECAPPING LAST WEEK
Risk assets ended the week lower, and volatility spiked after a stunning reversal in technology shares on Thursday. Monetary policy remained top of mind as the release of delayed economic data and commentary from Federal Reserve officials led to sharp fluctuations in expectations for a December rate cut. The Nasdaq Composite index sank 2.7%, while the S&P500 dropped 2%. The Russell 2000 rallied nearly 3% on Friday to finish down only 0.8%. The technology sector plunged 5% as investors took profits despite an upbeat forecast from chip giant Nvidia. The world’s largest company by market value was up more than 5% following its midweek earnings release but ended down 6%. Consumer discretionary fell 2.3% after mixed earnings results from the U.S. retail giants. Cryptocurrencies remained under pressure, with Bitcoin tumbling 11% to levels last seen in April. Oil prices slumped more than 3% as the U.S. stepped up its push for Ukraine to accept a draft plan to end the war with Russia, while gold futures were flat in a quiet week. U.S. Treasury yields fell amid conflicting views on the state of the economy and the future path of interest rates. The long-awaited September jobs report showed a better-than-expected payrolls increase of 119,000, with the unemployment rate ticking up only slightly to 4.4%. The return of weekly jobless claims data revealed that first-time applications for benefits remained stable at low levels. However, a rise in continuing claims suggested a lethargic pace of hiring that could lead to a higher unemployment. The Bureau of Labor Statistics announced that October’s nonfarm payrolls would be combined with the November report, to be released on December 16. Unfortunately, that comes days after the Fed’s December 9-10 policy meeting, meaning that the next rate decision will likely be made based on a less-than-clear picture of the U.S. labor market. Minutes from the October FOMC meeting and ongoing commentary from Fed officials clearly showed that the committee remains divided on issues like employment and inflation risks. December rate cut odds fell below 40% after the September payrolls upside surprise but rebounded to 70% on Friday after New York Fed President Williams said he still sees room to adjust lower. That also helped risk assets, especially small-cap stocks, recover some of Thursday’s losses. Turning to other economic data, U.S. flash composite PMI accelerated to 54.8 this month, but input cost inflation surged to the highest rate in three years. The final November consumer sentiment index slipped to 51—one of the lowest levels on record—as Americans remained frustrated by high prices and weakening incomes. Inflation expectations eased but at 4.5% remained elevated over the next year and 3.4% for the long term. Overseas, Japan’s government approved a 21.3 trillion yen ($135.4 billion) economic stimulus package, sending long-term government bond yields to record highs and the yen to 10-month lows. Investors speculated that the Bank of Japan may have to intervene in the currency market for the third time in as many years and hike rates sooner rather than later as the sinking yen inflates consumers’ cost of living. Finally, Eurozone business activity grew steadily this month even as Germany’s economy lost momentum. Inflation in the UK eased in October to 3.6% YoY, boosting chances for a December rate cut.
THE WEEK AHEAD
The U.S. markets are closed on Thursday for the Thanksgiving holiday and shutter early on Friday. With limited trading days and the potential for thinner liquidity, volatility may remain elevated. Now that the government shutdown is over, economic data, albeit outdated, will start to flow and can still influence the Fed’s next rate decision. The delayed September retail sales report is slated for release on Tuesday, and investors will also be awaiting results from this coming weekend’s kickoff of the holiday shopping period. With the October CPI report having been cancelled and the November figures being delayed until December 18, Wednesday’s core PCE price index reading from September takes on additional importance. A mild report could further boost expectations for a rate cut and be supportive of risk assets. Other U.S. economic data tentatively scheduled for release include consumer confidence, September PPI, Q3 GDP, and pending home sales. On the international side, the UK is expected to announce its 2026 budget midweek, with the focus on the magnitude of tax increases. Japan has two additional inflation updates on the heels of last week’s national core CPI, which came in at 3% YoY for October. Germany and Australia will also release CPI figures.
CHART OF THE WEEK
Volatility extremes
Volatility is an interesting passenger in the road trip of asset class performance. Equities are usually driving the car with bonds and commodities along for the ride. Meanwhile, volatility is often asleep in the back seat until it suddenly wakes up in a panic over how fast the car is going, as was seen last week when the volatility index (VIX) popped above 28. At the same time, the S&P500 index (SPX) fell to a level near last month’s low near $6,550. The volatility term structure inverted briefly midweek and fully on Thursday as the 30-day VIX registered a higher value than the three-month volatility index (VIX3M), which is represented on the lower part of the graph by the ratio of the two indices falling below 1. Typically, VIX3M is higher than VIX, as generally there is more potential for volatility the farther one looks into the future. When that’s not the case it can signal that fear and uncertainty may be reaching a near-term extreme. When the longer-term trend of SPX is pointing higher, a volatility inversion may suggest that a pullback like we’ve seen the past few weeks is nearing an end. Investors have become accustomed to solid fourth-quarter performance in most years, so if SPX can continue to hold that technical support near $6,550 and volatility subsides, the long-term uptrend could remain intact.
Source: Charles Schwab Corporation
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