The week ahead for financial markets should be dominated by two themes. First, the August Employment Report, due out on Friday, represents the last potential roadblock to the Federal Reserve’s plans to announce reduced bond purchases.
-David Kelly, chief global strategist, J.P. Morgan Funds
The week ahead for financial markets should be dominated by two themes. First, the August Employment Report, due out on Friday, represents the last potential roadblock to the Federal Reserve’s plans to announce reduced bond purchases. Our models tell us that the economy may have added almost 200,000 jobs in August with the unemployment rate slipping to 7.3%. However, in light of last week’s upward revision to second quarter GDP, a number of 150,000+ on payrolls and 7.4% on unemployment would probably be enough to keep the Fed on track to begin a wind down to QE, with an announcement likely coming in a press release and Bernanke news conference following the September 17th/18th FOMC meeting.
Markets will of course be looking at other numbers also. The Markit and ISM Manufacturing Purchasing Managers Indices, both due out on Tuesday, may see some pullback from recently strong numbers. However, both numbers should remain solidly in the expansion category and should be seen in the context of PMI gains across most developed and emerging economies in August.
Light Vehicle Sales on Tuesday and Chain-Store Sales on Thursday should point to more consumer strength in August following a disappointing July. Also of interest will be the International Trade numbers for July as analysts begin to hone their forecasts for 3rd quarter GDP Growth.
News coverage will likely focus on the President’s decision to ask Congress for approval of limited action in Syria. This decision clearly involves some very important issues. However, markets will likely be more narrowly focused on its implications for oil prices.
Various geopolitical supply issues have been keeping oil prices somewhat elevated for the past couple of months, including the unrest in Egypt, rising sectarian violence in Iraq, and supply disappointments in Nigeria, Libya, and Sudan. While it is too early to speculate on the longer-term outcomes of the Syria situation in particular, it is important to remember that Syria plays a limited role in production and transportation of oil in the region. Once uncertainty regarding an escalation of this conflict is resolved, this particular risk premium on oil may prove to be temporary. Moreover, for the U.S. in particular, more domestic production and less domestic consumption has more than doubled U.S. commercial and strategic oil stocks relative to consumption since 2004, leaving it less vulnerable now than a few years ago should a reduction in Middle East oil supplies occur.
Beyond geopolitics, this week will see many central bank meetings, including the Reserve Bank of Australia on Tuesday, the Bank of Japan, Bank of England, and European Central Bank meetings on Thursday, and the Bank of Mexico on Friday. While none of these meetings is likely to result in changes in policy rates, the most important information from these may come from Mario Draghi’s press conference on Thursday which may contain a change in tone given the recent improvement in economic data across various Eurozone countries.
Additionally, the Central Bank of Brazil will release its minutes on Thursday, following its 50bps rate hike last week. Investors will analyze these minutes, as well as Brazil’s August Inflation release on Friday, for comments on the effects of the Brazilian Real depreciation and further actions the Central Bank is prepared to take to combat the falling currency.
Brazil is an example of the tough situation in which various emerging markets find themselves: anticipation of the Fed scaling back asset purchases is causing capital outflows leading their currencies to depreciate. The potential negative consequences for domestic inflation are then forcing their central banks to tighten monetary policy at a time that growth is disappointing. Investors will continue to monitor the depreciation of various EM currencies, such as the Indian Rupee and Indonesian Rupiah, and any measures taken to attempt to stop these declines.