To Taper or Not to Taper – that is the question, and Wednesday will be key.

Here’s the Need to Know This Week:

Last Week

The narrative surrounding the global economy didn’t really change all that much last week, despite the data being pretty disappointing.

Domestically, the spike higher in weekly claims to 360k was the biggest disappointment of last week, as the decline claims of the past month was one of the better things going in the economy.  Almost as disappointing were both the Empire Manufacturing and Philly Fed indices, which both turned negative. Again, these are watched because they are the first looks at May data—so they imply that regional manufacturing activity remains sluggish.  Even housing data was mixed this week, as starts missed expectations (although permits rose so call it a wash).  Finally, readings on inflation were also low, with year-over-year CPI coming in at 1.1%, well below the 2% Fed target.

Things weren’t much better internationally.  French, German and EU Q1’ 13 GDP all missed expectations, the German ZEW business sentiment index missed, and Chinese retail sales, fixed-asset investment and foreign direct investment all either met reduced expectations or were lower than estimates.

But, the takeaway is that none of that matters at this point.  The market isn’t really concerned about second-tier economic data (which all of last week’s reports were) and the only thing the market is focused on economically is the domestic jobs market and global PMIs, and specifically what effect those readings  will have on central bank’s policies.

But, the reason I’m pointing out this weak data is to make everyone aware that there are signs the economy is still not responding to central banks accommodation—so there remains no economic foundation on which the markets can rely  should central banks actually become less accommodative.  When that occurs, and despite the tapering talk it’s still a way off, we could see a bit of an air pocket in markets—so keep that in mind when thinking about positioning.

This Week

This week is all about Wednesday and Thursday morning.  As we know, the market is currently obsessed with WWFD (What Will the Fed Do) and we should get a lot more color on that this week.

First, and most importantly, Bernanke speaks before Congress at 10 a.m.  Multiple Fed presidents (including some doves) have recently expressed a desire to start “tapering” QE as soon as this summer.  But, this is still the chairman’s Fed, and the market will closely be watching his commentary to see if he is on board with the upstart movement to “taper” QE sooner than later.

Later Wednesday the Fed minutes from the most recent meeting will be released, and again the markets will be looking to see how extensive the discussion surrounding “tapering” QE was, and how many Fed presidents expressed “concern” about the potential negative effects of the current program.

Undoubtedly Bernanke will say during his testimony the Fed will remain data-dependent, so the third most important event this week will be the May flash PMIs, released Thursday morning (Chinese and EU flash PMIs will be released Wednesday night/early Thursday respectively).  Also Thursday morning, the weekly jobless claims will be monitored to see if the big jump we saw last week reverses itself (if it doesn’t, the market will take a lot more notice of it this week).

Finally, April durable goods are released Friday (although by that point people will be pretty exhausted and likely headed to the beach a bit early before the long weekend.