The Global Markets Weekly – 9/20/13

Week of Surprise

Markets clearly were stunned by the Fed’s decision not to pull back on asset purchases last week.  DE had argued that a close reading of FOMC texts suggested that economic data were not consistent with a move quite yet, and St Louis Fed President Bullard, practicing his own style of transparency with an extended post-blackout television appearance, said that he was “a little dismayed at those in markets that are saying that they’re surprised by this.”[private]

Yet, Bullard also noted that the possibility of a small adjustment had been discussed at the meeting, and said that, for the Committee, “that was a borderline decision.”  He went on to say that “October is a live meeting…it’s possible you get some data that sort of change the complexion of the outlook and make the Committee be comfortable with a small taper…”

It is hard to imagine that FOMC participants would have been unaware of market expectations going into the meeting—expectations that were embedded for weeks prior, and had not been ruffled by cautionary hints from any Fed player.  Jolting them, with a “borderline” decision, seems to inject avoidable uncertainty into a communication flow where more than enough is already unavoidable.

• U.S.: The schedule includes the now customary wave of post-meeting appearances by FOMC participants, some nine of them.  Data releases, meanwhile, will focus on areas of urgent Fed concern now—the housing sector, manufactured-goods demand, and inflation.
• Eurozone: Despite having only belatedly corroborated the pick-up in GDP that was highlighted by official Q2 national account data, the most closely watched pieces of data in the coming week will still be the PMI Flashes.  Otherwise the German election result may occupy market thinking fleetingly at the beginning of the week.
• UK: Markets are not going to draw much from the more limited array of data during the coming week, although the better Q2 GDP number bodes well for the Q2 Productivity report o due on Friday, a set of data central to BoE thinking.
• Japan:  There is very little on the holiday-shortened schedule, only the August corporate services price index (Wednesday) and the August consumer price index (Friday). The CPI will, of course, be the main event, but the importance of other price measures, over time, should not be underestimated.
• Emerging Markets/Regions:  In China, there are industrial profits and the HSBC-Markit PMI, the latter expected to move up a bit further above the 50 expansion/contraction threshold.   In Mexico, biweekly CPI is expected to be roughly 0.2% during the first half of September, possibly presaging a full-month inflation decline from 3.5% Y/Y to around 3.2% Y/Y.  In Brazil, with recent data relatively constructive (strong formal sector employment gains, lower CPI annual inflation, for example) attention turns this week to the widening current account deficit.  A worse than anticipated outcome would tend to affect the markets more intensely than is normal, given the still precarious nature of the current payments equilibrium.

gmw_0920[/private]