ADP and GDP readings massive ahead of the opening bell

Good morning,

• Volatility hit from all sides ahead of key data and Fed announcements;

• ADP and GDP readings massive ahead of the opening bell;

• Fed statement eyed for rate hike clues.

It’s been a fairly slow start to the week so far, with volumes and volatility being hit from all sides. The biggest cause of this has been a lack of significant economic data to provide any kind of catalyst for the markets, along with the fact that when we see such a large amount of major data releases and central bank decisions later in the week, traders tend to remain on the side lines more so than usual. Add this to summer slowdown that is often witnessed in the markets and you’re left with the kind of situation we’ve seen so far this week.

Fortunately, we’re now entering the latter half of the week so volatility and trading volumes should improve significantly. The first half of the European session has been pretty quiet but that’s to be expected considering the data and Fed decision to come and, as with the rest of the week, the lack of big data being released.

This should all change ahead of the opening bell on Wall Street with the release of the ADP employment change and second quarter GDP figures. The ADP release is intended to be an estimate of the non-farm payrolls figure, which will be released on Friday and measures the number of jobs created in July. In reality, the first reading tends to be a pretty unreliable estimate of the official NFP figure and is only useful in predicting a much higher or lower number than analyst forecasts. The best example of this was last month when the ADP figure was close to 300,000 than 200,000 which was expected and the NFP release followed suit.

The GDP reading could really shake things up today and may well play a big part in the Fed’s decision on interest rates. The 2.9% contraction in the first quarter was extremely disappointing for the US, given that heading into the year hopes were for a strong recovery in 2014. However, it was also expected following some dreadful weather in the first quarter which forced analysts to significantly lower their forecasts. This left us with a situation in which the country needs to record 2.9% growth in the second quarter, which is what is expected, if the country is going to head into the second half of the year having no contracted in the first half.

If the US falls short of expectations here, it may suggest that the impact of the first quarter slowdown has stretched beyond the quarter itself and had an impact on the overall recovery. This would not be ideal by any stretch of the imagination, the only silver lining for the markets is that it may be enough to delay the first rate hike which could come as early as the first quarter of next year, at this rate.

Finally today we have the FOMC monetary policy decision, which is almost guaranteed to include another $10 billion taper, bringing the asset purchase program to $25 billion, and no rise in interest rates. While there is no press conference scheduled for after the announcement, a statement will be released alongside and this will be picked apart for any hawkish tones or hints at earlier rate hikes. Should we get either of these, I expect to see quite a significant market reaction, with investors then pricing in an announcement of some kind at the Jackson Hole symposium next month. This event has been used on numerous occasions in the past to drop big hints at changes in monetary policy so I see no reason why it won’t be used again.

The S&P is currently seen opening 2 points higher at 1,971, the Dow 22 points higher at 16,934 and the Nasdaq 9 points higher at 3,968.