As Wall Street returns after Labor Day, trading could be volatile and focus on rising interest rates

Published Fri, Sep 2 20223:29 PM EDTUpdated Fri, Sep 2 20224:18 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

As investors return from the long Labor Day weekend, they are likely to find the focus will fall squarely on central bankers in the week ahead. That could mean more volatility for both stocks and bonds. There is a dearth of earnings news and economic reports. Instead, investors are likely to more closely follow the actions by global central banks and speeches from Federal Reserve officials, including Fed Chairman Jerome Powell, who speaks at a Cato Institute conference on Thursday. Fed Vice Chair Lael Brainard is also among the more than half dozen Fed speakers in the coming week. On the economic calendar, there is ISM services data for August on Tuesday and July international trade and the Fed's Beige book Wednesday. "Tuesday is Australia's central bank, and they'll likely raise 50. Canada is Wednesday and they'll likely go 75, and the ECB on Thursday could do 75 as well," said Marc Chandler, chief market strategist at Bannockburn Global Forex, referring to half- and three-quarters point interest rate hikes. Chandler said the dollar, which has had a strong run, could consolidate as other global central banks raise interest rates. The dollar index climbed more than 0.7% for the week and up 7% over the past three months. "Maybe we're in for a short-term [dollar] correction," he said of the dollar. That could be accompanied by higher stock prices and lower Treasury yields, he added. "Everyone got so bearish and with good reason. I think everyone overplayed it a little bit," said Chandler of the sell-off in stocks and rise in bond yields. Yields move opposite bond prices. The closely watched 10-year Treasury yield was at 3.19% late Friday afternoon, but off its intraday high of about 3.28%. The August employment report Friday showed the economy added 315,000 jobs, near what was expected. But the report also c ontained some positive surprises . For instance, there was a surprise jump in the participation rate to 62.4 %, up 0.3 percentage points. That means more people came off the sidelines to join the workforce. Wage gains also were less than expected. Some economists viewed the fact that the workforce in August surpassed the pre-pandemic high as another good sign. "If the needle moves a little bit more in favor of a soft landing, then this is good for corporate America too," said Chandler. Traders also viewed the jobs report as opening the door to a potential smaller half-point rate hike from the Fed at its meeting on Sept. 20-21. The futures market, however, was still pricing in fairly high 65% odds of a 75-basis-point Fed rate hike. That would be the third in a row after similar increases in June and July. The next big economic report ahead of that Fed meeting is the August consumer price index on Sept. 13. "I think we'll have to get through the CPI report. This doesn't take 75 off the table, but it leans it more toward 50," said Jim Paulsen, chief investment strategist at Leuthold Group. Market oversold? Stocks were lower in the past week, and failed to hold an early bounce following Friday's jobs report. The S & P 500 closed at 3,924, off 3.3% for the week. Earlier in the week, the index fell through its 50-day moving average, which is literally the average of the last 50 closing prices. A break beneath that level is viewed as a negative sign for momentum. Keith Lerner, co-CIO and chief market strategist at Truist Advisory Services, said some of the recent moves lower could be put to the test Tuesday when more investors are back in the market, as summer unofficially comes to a close. "It's the other side of Labor Day. Market volumes have been relatively thin. You're going to get more of Wall Street back in their seats to digest what's happened," he said. He expects markets to focus on Fed and other central bank comments in the coming week. "At least short-term, we think things had moved too one-sided since that June low," Lerner said. "Breaking below [the 50-day] was a good thing. It brought in more fear and a little bit of a washout." He said he expects there could be some gains in the coming week. "We went down about 8% in 12 days," he said, referring to the S & P 500. "We think the top of the range is pretty much well cemented after the sell-off." The top of the recent range would be the high of 4,325 from Aug. 16. Technically speaking Scott Redler, partner with T3Live.com, said the S & P 500 failed to hold resistance at 4,018, and that could be a problem for the index in coming sessions. He said if the S & P does not hold 3,903, traders will be looking for a test of the lows. Strategas technical analyst Todd Sohn said he is watching a key technology-heavy index for signals on the market's next move. He said the Invesco QQQ Trust , which represents the Nasdaq-100 index, is testing a short-term support level between $293 and $295. That was the 61.8% retracement level from the June trough to the August high. The QQQ closed Friday at $295.17. "If the market is unable to hold that level, I think we will test the June lows and break them," he said. Sohn said it's possible the S & P 500 could also test its low of 3,637 if the QQQ were to break down and the S & P does not hold 3,900. Oil drill Oil prices fell sharply in the past week, with West Texas Intermediate crude futures down about 10% at just above $83 as of Friday afternoon. OPEC+ meets Monday, and it is expected to discuss cutting production to bolster prices. "We think they will likely keep the official production policy in place for now," notes Helima Croft, head of global commodities strategy at RBC. "Given the recent volatility in prices, we certainly cannot rule out that the group tries to put in a floor, especially if there is another major move lower." Week ahead calendar Monday Labor Day Markets closed Tuesday Earnings: Gitlab, Coupa Software 9:45 a.m. August PMI services 10:00 a.m. August ISM services Wednesday Earnings: John Wiley , NIO, Dave and Buster's, GameStop, Verint Systems, Asana, Caseys General Stores , AeroVironment 8:30 a.m. July international trade 9:00 a.m. Richmond Fed President Barkin 10:00 a.m. Cleveland Fed President Loretta Mester 12:35 p.m. Fed Vice Chair Lael Brainard 2:00 p.m. Beige book 2:00 p.m. Fed Vice Chair for Supervision Michael S. Barr Thursday Earnings: American Outdoor Brands , DocuSign, Smith & Wesson, Zscaler, Zumiez 8:30 a.m. Weekly initial jobless claims 9:10 a.m. Fed Chairman Jerome Powell at Cato Institute monetary conference 3:00 p.m. July consumer credit Friday Earnings: Kroger 10:00 a.m. July wholesale trade 10:00 a.m. Chicago Fed President Charles Evans 12:00 p.m. Fed Governor Christopher Waller 12:00 p.m. Kansas City Fed President Esther George