Stocks managed a mid-day rebound from a 566-point decline in the DJIA. Among the suggested reasons was more help from central bankers. With a light economic calendar, I expect Fed speculation to compete with earnings in the week ahead. Everyone will be wondering:

Will the Fed signal a dovish tilt?

Prior Theme Recap

In my last WTWA I predicted that everyone would be watching earnings reports carefully, wondering if they could provide a floor for stocks. There was indeed a lot of attention to earnings, but that news did not seem to support the stock market. The stock rebound coincided with a mysterious rally in oil. (Could some really have been confused by the shift from the expiring front month contract? Really??) You can see the mixed story for stocks from Doug Short’s weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

Doug’s update also provides multi-year context. See his weekly chart for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

There is a fairly light economic calendar this week, featuring the FOMC decision on Wednesday. Despite the continuing flow of earnings reports, speculation about the Fed will dominate market discussion until after the meeting. Everyone will be wondering –

Will the Fed signal a dovish tilt?

No one expects a change in rates at this Fed meeting, but the language in the statement will be carefully parsed for signs that the path of future increases will be less aggressive. Here are the key viewpoints:

  • The Fed is out of touch with the economy, increasing rates at the wrong time. What is needed is more QE.
  • The Fed must reduce the implied four rate hikes to one or two, in line with market expectations.
  • Higher U.S. interest rates, just as other countries are reducing theirs, will strengthen the dollar. This will hurt the U.S. economy as well as provide more pressure on commodities.
  • Fed policy matters little right now. It is all about oil prices.
  • The Fed sees a stronger economy than do market participants. There will be no hint of a more dovish policy.

    • You will see vigorous proponents for each of these viewpoints.

    As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.

    • The Good

    On balance the news was pretty good last week.

  • People are driving more. This is good news since it provides more satisfaction without additional cost. Calculated Risk notes that gas prices are down about seventy-four cents per gallon while miles are up 4.3%.

  • ATA truck tonnage improved by 1% over last year. The organization’s chief economist, Bob Costello, cautioned that the overall results for the year were not that strong. He cited high inventories in the supply chain.

  • Existing home sales were very strong. Calculated Risk explains the positive effect of changes in regulations, as well as the needed and likely increase in inventory.
  • High frequency indicators have improved. New Deal Democrat has an excellent weekly report that includes many items you might otherwise miss. I always read it, and you should, too.
  • The earnings news has been pretty good. Bespoke reports the data. Long-time earnings expert Brian Gilmartin notes that reports often improve as the season continues.

    • The Bad

    Some of the economic data was disappointing.

  • Initial jobless claims increased again, this time to 293K. The less volatile four-week moving average also moved higher. I watch this closely. It remains at encouraging levels, but the move bears watching.
  • Housing starts and building permits declined. Calculated Risk, our go-to source on all things housing has the full story, great charts and analysis. Bill McBride believes that next year will see a reduction in the ratio of multi-family starts. New Deal Democrat was a bit more positive.
  • Sea container counts remain weaker than last year. Steven Hansen (GEI) reports.
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