WWFD (What Will Fed Do) is Now the Driving Force of Markets


Last Week

Last week was very quiet economically speaking, although what little data there was generally beat expectations. The majority of the data last week was internationally focused.

In Europe, the composite PMIs (manufacturing and service), German manufacturers orders, industrial production, and exports all were better than expectations.  The bottom line out of Europe last week was the data implied a slight uptick in economic growth, although most of the releases are pretty minor ones.  The fact that they were watched was more a result of the very quiet calendar, rather than for insight into the EU economy.

In China, trade balance beat estimates, although the export data looked somewhat suspect and people were generally discounting it.  The big print of the week, Chinese CPI, was a bit higher than expected, but PPI was lower so it was considered a wash.

There was only one notable release last week domestically and that was jobless claims, which again were positive and moved to new lows, implying continued incremental improvement in the labor market (claims are at their lowest level since January 2008).

The real focus last week, however, was on central banks, and specifically whether the Fed was more seriously considering tapering the current QE program than was generally believed.  Speculation on that caused stocks to stall late in the week and caused the U.S. dollar to surge higher.  Also, speculation is boiling over about what the ECB does next, and the growing expectation that they will “do more” was furthered last week by comments from various ECB officials.

This Week

There is more data this week than last, although it still shouldn’t be classified as a “busy” week.  Importantly, the market will likely trade more off central bank expectations than the absolute data itself, so we need to be looking at economic data through the prism of “what will it make the central bank do.”

Given that, we may be facing this perverse “good data is bad for the risk assets” situation as in the very short term the market seems a bit spooked by the Fed considering “tapering” QE.

In Europe it’s the same sort of thing, only the market has priced in, to a point, the expectation of the ECB doing “more.”  If the economic data is stronger than expected, then we might see the market react negatively.

In that vein, inflation data this week (CPI and HICP, which is the euro inflation index, both released Thursday) will be pretty important.  At this point, the Fed seems borderline dismissive of the dis-inflation creeping into the economy, but that may not be the case if CPI declines further.  So, a low CPI reading will be dovish (and probably positive for risk assets), while higher CPI will be hawkish.  In Europe, disinflation is seen as the main catalyst pushing the ECB to “do more,” so it the same thing—low HICP will be dovish while high HICP will be hawkish.

Elsewhere, retail sales (today) will be closely watched as the consumer lately has shown some signs of exhaustion due to higher payroll taxes and healthcare costs. Any further evidence of that trend won’t be welcomed by the market.  We also get our first look at May economic activity via the Empire and Philly Fed manufacturing surveys (Wed/Thurs).  Again these data points are important because the market is watching to see if the slowdown in growth in late March and April is merely temporary.

Other numbers to keep an eye on are industrial production (Wed) and another round of housing data kicks off Thursday with Housing Starts.  In Europe, this week looks pretty quiet, as industrial production and the German ZEW survey (both Tues) are the only releases to watch.

So, this week the market will be looking at the data in the context of:  1) Is the economic slowdown in the U.S.  only temporary, and is May data starting to pick back up and 2) What will the data mean for central bank’s propensity to reduce or expand accommodation.  Keep those two things in mind this week as the data is released.