U.S. equities bounced quite a bit on Friday in what was a volatile session, which was likely influenced more by John Boehner announcing his retirement than anything else. On the economic front, second-quarter GDP growth was revised up to a 3.9 percent seasonally adjusted annual rate from the previous estimate of 3.7 percent. Consumer spending was strong, with final sales up at a 3.9 percent rate and residential fixed investment up at a 9.3 percent rate.
Following Fed Chair Janet Yellen's speech after the close Thursday -- in which she sounded a hawkish note justifying a rate hike before the end of the year -- Friday's Fed speakers didn't really say anything new. St. Louis Fed President James Bullard said he believed the central bank's employment goal has already been hit, but he admitted it could be tough to hike rates at the October policy meeting due to the lack of new economic information between now and then.
This gives further support to the idea of a December rate liftoff.
Today will feature a number of key economic releases, including the August personal income and consumption data that could indicate building wage inflation pressure, something Fed policymakers are keen to see as a justification for higher interest rates. Tuesday will feature the September consumer confidence report.
But on Friday, as the calendar turns to October, we'll get the all-important monthly payroll report. Deutsche Bank is looking for a gain of 200,000 new jobs and the unemployment rate holding steady at 5.1 percent. A strong report will bolster the odds of a Fed liftoff before year-end, a possibility that's been weighing on stocks for the last two weeks.
Indeed, as the team at Capital Economics noted, the Fed's latest "Summary of Economic Projections" reveals that 13 of 17 Fed officials are on the record as expecting to lift interest rates no later than December.
A mediocre-to-weak jobs report would only fuel further confusion. Michael Gapen at Barclays Capital noted that Yellen's recent comments suggest a level of internal dissonance. On one hand, she said the economy has made enough progress to justify a rate hike. But on the other, she's worried about disinflationary pressure being more persistent than expected.
According to Gapen, the "persistent inability of the [Federal Open Market Committee] to arrive at a consensus view on the labor market this late in the (economic) cycle has led to a convoluted communications process." In other words, all of this talking has markets perplexed and nervous. No wonder the CBOE Volatility Index (VIX) -- known as Wall Street's "fear gauge" -- remains elevated.
A clear trend of improvement in wages and sustained strong job growth would go a long ways toward resolving this confusion -- and force traders to prepare for the looming reality of higher interest rates.