The Week Ahead: Surprise, Surprise, the Focus Will Be on the Fed (Again)

When looking forward at the week to come, there are generally two areas to look at for potential influences. There are macro indicators, such as economic data releases, both here in the U.S. and elsewhere, and then there is company-specific news such as earnings reports. Even though a couple of significant firms, such as Costco (COST) tomorrow and Micron (MU) on Thursday will give us numbers this week, earnings season doesn’t kick off in earnest until Alcoa (AA) reports next Thursday. That means that the focus this week will be on economic data and news, and in that area there is no shortage of things to look at.

The pre-market personal income data this morning (Monday) will be followed by Pending Home Sales at 10 AM. This and other housing numbers have taken on increased significance lately as homebuilding has been one of the bright spots of the economy. The consensus is that this morning’s number will show a 0.5 percent Month on Month increase and in the current pessimistic mood any read below that could spark a selloff in stocks.

That tendency to look for bad news will also probably be in place on Tuesday when traders consider the consumer confidence number. The index is expected to show a decline from last month’s 101.5 to around 96. Given that, even a match to those expectations could be seen as a negative, so it would take a surprise to the upside to have any real effect. Both home sales and consumer confidence will be interesting, but they are really just a teaser for the big stuff to follow.

It should surprise nobody that the focus of most traders and market watchers this week will be on the Fed in one way or another. The fact that we are all so tired of hearing that supports my contention that the FOMC should have raised rates at the last meeting, even if just to get it out of the way. Markets that are driven by the words and actions of central banks above all else are inherently distorted, so regardless of the desirability and efficacy of the extended period of ultra-low rates, the market’s obsession with the Fed above all else indicates that it is time to move on. Whether you agree with that or not, the fact remains that they did not move this month and the guessing game continues.

That is why we can expect every word of the speech that Chair Janet Yellen will give at 2 PM on Wednesday to be scoured for hidden meaning. This Fed watching game can get a bit ridiculous at times, and never more so than when we start to break down the word choice in a speech. If Janet Yellen comes out and says something outright about the most likely timing of a rate hike then of course you should listen. If, however, it is a question of analyzing vocabulary and “tone” then the best thing that traders and investors can do is to ignore the noise.

Instead, turn your attention to the jobs data that we will have this week; numbers that will tell us far more about what the Fed is likely to do and when they are likely to do it than the specific words that Yellen uses. Weekly jobless claims on Thursday will be followed by the big one, the actual jobs report on Friday morning. The consensus view here is that non-farm payrolls will bounce back above the important 200 thousand mark after last month’s weakness, and that the headline unemployment rate will remain unchanged at 5.1 percent.

Unlike data earlier in the week that probably contain mostly downside risk, the impact of the jobs numbers could go either way. It seems that the market is now resigned to the fact that a rate hike is coming, and that there is more to worry about in the Fed’s perceived weakness in the economy than in a 25 basis point increase in rates. That means that good jobs numbers which, in the past, could have led to a selloff in anticipation of higher interest rates, would now be seen as pure, unadulterated good news. Any weakness on the other hand, and particularly a tick up in the headline unemployment rate would confirm fears of a real slowdown and could be bad news for stocks.

In many ways it is a relief that, at least as far as the jobs numbers go, this week will be about going back to basics. The whole “good news is bad news” thing has become a little wearisome and it will be nice to get back to a situation where strength in the U.S. economy is actually seen as the good news that it is. For that, if nothing else, we should be thankful.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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