What to Watch Out for Now

Smart analysis from Randy Frederick, managing director of active trading and derivatives at the Schwab Center for Financial Research. With the debt ceiling deadline looming in just 10 days, besides volatility rising, he is watching key economic reports due later this week. Here’s what Frederick says:

• “Last week, jobless claims rose by 1,000 to 308,000. With this increase, the four-week moving average still decreased to just 305,000 – the lowest level since May 2007. While there were a few reporting problems in the past few weeks, which I thought might have resulted in a big uptick, it seems those issues have been resolved with only a modest uptick (16,000) in the September 14 report. This implies that the trend is improving, and I expect that to continue this week.”
• “Retail sales will be reported Friday. This report continues to be widely watched as a gauge of consumer sentiment and spending habits. In the past couple of months, the trend has been somewhat disappointing and the consensus outlook for this report seems unlikely to change; however, a positive report would be a welcome relief and likely cause a lift in stocks in the retail sector.”
• In the unlikely even the debt ceiling is breached October 17, Frederick says “the dollar would experience a sharp devaluation, interest rates would increase, a severe recession would ensue which would lead to massive layoffs, larger deficits, lower tax receipts and severe disruptions in international credit and trade. In other words, unprecedented global economic calamity in my opinion. Similar circumstances resulted in a 17 percent correction in 2011.”
• “While there is some discussion that the Fed’s next move could be an increase in bond buying rather than a reduction, I expect tapering will likely be announced at the last meeting of the year on December 18, as the Fed’s next scheduled meeting is too soon for the group to change their position from the September meeting.”