Strong Dollar and Rising Volatility as Third Quarter Ends

In days leading up to the close of the 3rd quarter, stock and bond markets saw increased volatility. Some investors suggest price swings will become an ongoing theme following a relatively quiet summer - not to mention the eventual rate increase by the Fed draws closer, raising investor uncertainty about the effects of the policy shift. 

Despite all-time highs, the stronger dollar and rising volatility may continue to support the U.S. stock market and hamper flows into emerging markets, as investors become less inclined to take risks among this environment.

Caution Rises with Interest Rates for Junk Bonds

As the Federal Reserve has planned to begin raising rates in the summer of 2015, investors are keeping close watch on junk bonds and other risky assets. Stronger economic growth, and a rising interest rate environment in 2015, will negatively impact the prices of riskier assets, including lower-rated corporate debt. Over time, rising borrowing costs could lead to a rise in defaults.

Corporate borrowings have risen to two times earnings as of March 31, compared with 1.76 times at the end of 2010. Investors can benefit by being more circumspect about the bonds they buy since companies with more leverage and lower ratings are typically at a higher risk of default if rates rise.

Fed Meeting Results: No Rate Hikes Until Summer-2015

The Federal Reserve announced Wednesday the earliest it plans to raise interest rates in the summer of 2015. The Fed also plans to end the bond-buying program known as quantitative easing after October, halting a six-year bond-buying effort that has left the Fed holding more than $4 trillion of Treasury and mortgage bonds.

What remains worrisome is that GDP has consistently underperformed the central bank's expectations and projections were again reduced through 2017. The Fed's updated forecast showed policy makers expect the economy to expand at a pace consistently below 3% until 2017. 

U.S. Hiring Headcount Highest Since 2007

The number of hires by U.S. employers in July reached the highest level since 2007 and job openings hovered near their highest level in 13 years, the latest sign of improvement in U.S. labor markets.

The U.S. Labor Department reported that employers hired 4.9 million workers in July, the highest level since December 2007.  

Interestingly, there were approximately 2.1 unemployed workers for every job opening for July, down from three workers per opening one year earlier. To put this in context, there were almost 6.5 unemployed workers for every opening at the depth of the recession in 2009. 

Quiet Monday Following Disappointing Jobs Report

Monday was relatively quiet following Friday's weak August Employment Report. The report told us the economy added just 142,000 new jobs, the tiniest gain since December 2013. The unemployment rate dipped from 6.2% to 6.1%, but so did the labor force participation rate, as more people were discouraged from looking for work. 

This full week of work isn't very full of economic data. At least we'll see how well consumers are helping the economy. A good measure of that, Retail Sales, should be up for August. The University of Michigan Consumer Sentiment Index, a gauge of attitudes, is also expected to edge forward.

U.S. Dollar Strengthens

The Institute for Supply Management  U.S. manufacturing index rose to 59.0 for the month of August, demonstrating its the strongest level since March 2011 - levels above 50 indicate growth. The 10-year U.S. Treasury posted its biggest daily rise in a month up to 2.419 percent. 

The U.S. dollar is gaining ground against the euro, moving up 5% versus the euro since the start of the year. The European economy is hampered with concern and uncertainty between Ukraine and Russia, causing a drag on consumer confidence levels. This might lead to more investors selling euros and purchasing dollars.