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Expect Volatility as 4 Big Economic Reports Collide: LPL’s Canally

By Janet Levaux

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This week is special, according to John Canally, economist and investment strategist for LPL Financial (LPLA). But not in a good way.

The reason? Too many meetings and too many issues.

For instance, there’s the FOMC gathering Tuesday and Wednesday.

“Eight times per year, the outcome of the Federal Reserve’s Federal Open Market Committee meeting becomes the focal point for market participants,” Canally said in his latest outlook report issued late Monday, “Mid-Spring Surprise.”

And four times each year, headlines focus on the health of the economy in the prior quarter, as measured by the Bureau of Economic Analysis’ report on gross domestic product.

“Similarly, at the start of each month, the Report on Business from the Institute for Supply Management (ISM) and the monthly labor market report from the U.S. Department of Labor are the centerpieces of any trading week,” Canally noted.

“Only eight times in over 14 years have the FOMC meeting, GDP report, ISM report, and the employment report — all often market-moving events — occurred in the same week,” he explained. “Historically, these weeks have exhibited 20% more volatility than an average week over this time span, as measured by the S&P 500 Index.”

In addition, in such weeks, the VIX (VIX) has been 4% higher than normal. “Add in the 139 S&P 500 companies expected to report earnings, and this week is unlikely to be just another boring mid-spring week for financial market participants,” Canally wrote.

(The Fed and FOMC will make a series of announcements on Wednesday, when GDP data will also be released; on Thursday, manufacturing figures will be reported; and employment figures are set to go public on Wednesday and Friday of this week.) 

As if these events and statistics weren’t enough, there’s more: The markets “will digest U.S. vehicle sales for April, pending home sales for March, home prices for February, and key data in China (Purchasing Managers’ Index for April) and Japan (housing starts and vehicle sales for April), along with the Bank of Japan’s monetary policy meeting,” the expert adds.

FOMC, GDP Focus

LPL Financial analysts, like other experts, expect the Fed to trim its bond purchases by $10 billion per month this year and “to remain on pace to exit quantitative easing by the end of 2014.”

They think interest rates will stay low for a “considerable time” after the QE program ends.

As for the next jobs report, it “will likely show that the economy barely expanded in the quarter, due in part to severe winter weather in much of the nation,” says Canally. “The FOMC will likely acknowledge this in the statement.”

Likewise, the figures for latest consumer spending, housing (residential investment), and business investment are expected to reflect the poor weather, too.

Looking at the full-year 2014, U.S. economic growth could accelerate to about 3% in 2014, the LPL economist says, after growing at less than 2% in 2013.

“Growth in 2013 was stifled by tax increases and spending cuts that added a material drag to the economy,” he concluded. “That drag fading, as well as solid business and consumer spending, should help to boost GDP this year.” 

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