At the end of last week, US data painted a rather unflattering picture of the US labour market. Not only was the non-farm payroll increase smaller than expected but the household survey indicated that the drop in the unemployment rate was entirely due to shrinking participation. That and other data suggest that, five years after the financial crisis accelerated, the global economy is still hindered by the cost of the poor use of capital in the 2000s. Nonetheless, markets remain fairly buoyant, and both equities and US/core Eurozone rates moved higher on the week. That suggests faith in an eventual recovery that is likely to continue to shape market perceptions as long as leading indicators remain robust.
The key event and debate next week surrounds the FOMC and the timing and size of the QE ‘taper’. We expect the Fed to announce a USD10bn reduction in monthly asset purchases, split equally between Treasuries and MBS. Such an outcome would not present a surprise to markets and that suggests, on the “sellthe-fact” principle, that both G7 interest rates and the USD exchange rate could retreat in its aftermath. Of course, that is merely a tactical effect but one to look out for nonetheless, after significant recent moves in the opposite direction. The other key central bank event is the first RBI meeting led by the new governor, which has the markets wondering whether measures distinct from higher rates will be adopted in defence of the INR.
The huge Verizon corporate bond sale (USD49bn) has attracted considerable attention in the busiest week ever for US corporates (over USD80bn of such supply according to Bloomberg). The depth of credit supply for the productive sector is reassuring (not least to the Fed, but such volumes also speak of the urgency with which borrowers wish to lock in rates before they rise a lot further. Our colleagues traveling far and wide report a degree of investor/borrower acceptance that this is the start of a proper bond bear market that was lacking a few months ago.
Political events also bear watching, with elections in Bavaria, this Sunday, offering a preview of important national German elections one week later. The Syria question, conversely, remains of limited economic impact and indeed it is worth remembering that the rise in oil prices arguably reflects as much increased economic activity as it does Middle East turmoil.
Read more: http://www.efxnews.com/story/20715/next-weeks-market-mood-all-eyes-fomc
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