Summer's ending, Fed's back in play and September volatility looms — oh my!

Summer's almost officially over, and it's time to get ready for some rock and roll in the markets.

Now that the Fed has upped the chances for a September rate hike, the quiet dog days of August are ending and markets will obsess about any data that could influence the Fed's decision — including Friday's big August employment report. Economists are expecting about 180,000 jobs were created in August, after July's 255,000, and that's strong enough job growth to tip the Fed's hand if it sees enough other reasons to hike.

William C. Dudley, Janet Yellen and Stanley Fischer in Jackson Hole
Sabrina Korber | CNBC
William C. Dudley, Janet Yellen and Stanley Fischer in Jackson Hole

That jobs report also bookends a week that starts with Monday's personal income and spending — and the PCE price index, the Fed's favorite inflation measure. While expected to show muted price increases, the Monday data launch what could be a rockier week than the markets have experienced for most of the summer.

"As I look ahead to the next week, with that employment report looming large for the Fed and investors, in what historically is a thin week of trading, I do think we could see some volatility that we haven't seen," said Leo Grohowski, CIO at BNY Wealth Management. The coming week also leads up to the three-day Labor Day weekend and includes the final days of trading for the month of August, potentially volatile on their own.

The S&P 500 is slightly lower for August so far, but stocks are heading into the seasonally tough month of September. According to Stock Trader's Almanac, September is the worst performing month of the year for major stock indexes. Since 1950, the S&P 500 has seen an average September decline of a half percent, though it has done better in presidential election years, the almanac said.

The expectations for how markets could trade in September shifted fairly dramatically Friday, when the Fed inserted itself back into the market's near-term view. The Dow, moving up and down in a more than 230 point range Friday, traded in the biggest one-day band since late June. After Fed officials hammered home that a rate hike is possible, Treasury yields also snapped out of a range they've been in all summer. That in itself could add volatility to the stock market.

While December is still seen as the most likely timing for a Fed rate hike, Fed Chair Janet Yellen opened the door to a September hike when she said the case for a rate hike strengthened in recent months, during a much-awaited speech at the Fed's Jackson Hole symposium Friday. Fed Vice Chair Stanley Fischer further pushed the Fed's September meeting into play when he said in a CNBC interview that Yellen's comments were consistent with a Fed that could hike rates in September, as well as a second time this year.

"I think the Fed is trying to prime the market that it's trying for a hike, but I think its communication is quite poor," said Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments. Tannuzzo said the Fed is trying to take the markets back to the sentiment of last spring, when it was widely believed the Fed could hike rates more than once this year, prior to turbulence around the U.K. Brexit vote.

"There's still this optimism that central banks are going to remain supportive." -Leo Grohowski, CIO at BNY Wealth Management

Even though the Fed is pressing, many Fed watchers still say the Fed may wait to hike, not wanting to get in the way of the November presidential election. But Tannuzzo disagrees. "I don't buy the election impact. They have done a lot of very aggressive policy in election years and at meetings around elections," he said. However, he noted that more of the pre-election policy moves have been easing, not tightening.

"I think it would be foolish to ignore that a strong jobs number next Friday is something that could actually make the Fed move. I think the market will take it seriously if we have a strong number," Tannuzzo said. "If we have a lousy number, sure, you would take the Fed off the table."

Goldman Sachs economists Friday said their expectations for a September hike rose to 40 percent, up from 30 percent after the Jackson Hole comments. Their odds for a hike this year rose from 75 percent to 80 percent.

"Although neither Yellen's comments nor those of other officials have been explicit on the precise timing, this may reflect message discipline ahead of the August employment report to be released next week," the Goldman economists wrote. "In our view, if the employment report continues to indicate an improving labor market, the FOMC may well raise rates at the September meeting."

Some market participants say, however, anticipation about a rate hike could create enough volatility to trigger a tightening of financial conditions that would keep the Fed on hold for September.

But Grohowski sees stocks continuing to grind higher, and he says it's still more likely the Fed hikes rates in December.

"Economic data on balance has been improving, and then I think through all of this, there's still this optimism that central banks are going to remain supportive and supportive of what it takes to keep the economy afloat. I think that argues for a market that grinds higher," he said. The Fed is moving alone to tighten policy, as other central banks are easing. That has kept interest rates low in the U.S. and helped lift risk assets, but it also makes it more precarious for the Fed if the dollar shoots higher.

Grohowski said the stock market has exceeded his year-end target of 2,150 on the S&P 500, and he is looking at 2,300 or 2,350 for the end of next year.

For now, the U.S. presidential election is not a concern for markets, though comments from Democrat Hillary Clinton about Mylan's pricing of EpiPen hit that stock hard and sent the S&P health-care sector lower. The sector was down 1.8 percent for the week, second only to utilities, down 2.3 percent for the week. Utilities decline with rising rate expectations since they are popular for their dividend yields.

"I think the market has become accepting of a Clinton victory," he said. "I do think there's some time to go here, so if there's a change in that, that too would increase market volatility. If it looks like the election starts to look like it's a close one, that would be potentially disruptive to the market."

Stocks were mixed Friday on the highest volume in three weeks. The S&P 500 fell 3 to 2,160, while the Nasdaq was up 6 at 5,218. For the week, the S&P 500 lost 0.7 percent. The Dow was down 0.8 percent at 18,395 and the Nasdaq was down 0.4 percent at 5,218.

The dollar index, at 95.46 late Friday, was up 1 percent for the week. Oil was volatile, declining about 3 percent, after the week earlier's 9 percent gain.

As for Treasurys, the two-year was at about 0.84 percent Friday, a level last seen on June 3. The 10-year yield broke out to 1.63 percent, the highest level since June 24. It had been in a range between 1.50 and 1.59 percent for the entire month of August.

What to Watch


Earnings: Catalent, ScanSource

8:30 a.m. Personal income/spending


Earnings: Abercrombie & Fitch, Bank of Nova Scotia, Palo Alto Networks, H&R Block, DSW, Veeva Systems, AeroVironment

9 a.m. S&P/Case-Shiller home prices

10 a.m. Consumer confidence


Earnings: Brown-Forman,, Five Below, Shoe Carnival, Bob Evans, National Bank of Greece, Chico's

8 a.m. Minneapolis Fed President Neel Kashkari

8:15 a.m. ADP employment

9:45 a.m. Chicago PMI

10 a.m. Pending home sales


Earnings: Campbell Soup, Broadcom, Cooper Cos, Lululemon Athletica, Verifone, Lands End, Vera Bradley, Joy Global, Ciena, Smith & Wesson

August vehicle sales

3:15 a.m. Boston Fed President Eric Rosengren, Chicago Fed President Charles Evans in Beijing

8:30 a.m. Initial claims; Productivity and costs

9:45 a.m. Manufacturing PMI

10 a.m. ISM manufacturing; Construction spending

12:25 p.m. Cleveland Fed President Loretta Mester


8:30 a.m. August Employment report

8:30 a.m. U.S. trade deficit

10 a.m. Factory orders

1 p.m. Richmond Fed President Jeffrey Lacker