Weighing The Week Ahead: Will The Fed Be Data Dependent?

Back from a quiet, holiday-shortened week, market participants face an avalanche of data and plenty of FedSpeak. This is an irresistible combination for pundits, who will parse each economic report with emphasis on what it might mean for the Fed. In light of many Fed promises, they will all be asking:

Will the Fed really be data dependent?

Prior Theme Recap

In my last WTWA I predicted that the market stories for the week would emphasize individual stocks and include some rarely-seen faces doing TV interviews. This was fairly accurate, with CNBC featuring stock pick segments all week. I also suggested that the low volume of trading could lead to some volatility until data were released on Wednesday morning. The only volatility came intra-day on Tuesday in what proved to be one of the quietest weeks of the year. To get the full story, let us look at Doug Short’s weekly chart. Doug’s full post shows the various relevant moving averages in a very negative week for stocks. (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

The economic calendar brings together all of the most important economic reports. We also have the Fed’s Beige Book (used as a qualitative addition to the economic statistics at the next FOMC meeting). We will have plenty of FedSpeak, including Chair Yellen in front of the Congressional Joint Economic Committee.

The punditry loves to opine about the Fed and invite every guest or column source to do the same. The calendar combination will prove irresistible. If you are tired of hearing and reading about this topic, I understand. I could not agree more.

But my job here is to consider what will be the weekly focus, not what should be.

People will be asking:

Will the Fed (as promised) be data dependent in hiking rates?

There are several key viewpoints:

Data will show weakness, and the Fed will not hike rates. (Some still expect more QE).

Data will show some weakness, but the Fed will not be deterred.

Mixed data allows the Fed to hike as planned.

Strong data will emphasize the need for higher rates, reviving the “Fed behind the curve” arguments.

Most observers believe that Friday’s employment data will be the most important influence. Here are some ideas that most will not discuss or will get wrong:

People will speculate that Yellen “has the numbers” before her Congressional testimony on Thursday. This is an interesting idea, since the Fed gets some information a bit early to prepare some of their own reports. Theoretically, the overall report goes to the Fed Chair and the President the afternoon before the announcement. Many will expect Yellen’s commentary to reflect special knowledge, but it probably does not.

Nearly everyone will forget that the payroll employment number is based on a survey with a confidence interval of +/- 110K or so. This is just “sampling error” so it does not reflect any revisions due to more responses, changes in seasonal adjustments, or aligning with benchmarks.

Some will regard Thursday’s initial jobless claims as a relevant signal. It is not, since it covers a different period from the monthly employment report.

Expect to see plenty of support for each of these various positions, since every expert has an opinion about the Fed.

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

There was a little good news, but most results were in line with expectations.

Change in policy from Saudi Arabia. This is an important story, but a confusing one. There are two parts.

Would higher oil prices be good? In general, lower oil prices seem to be positive for most countries, lowering the consumption “tax” for consuming nations. Despite this, stocks have been positively correlated with oil prices.
Is this really a policy change? The FT carried the story this week, and it was treated as fresh news by many observers. Others noted that similar statements were made several days earlier. (Bloomberg)

Personal income showed solid growth. The gain was 0.4% month-over-month and 5.3% over last year, the best gain since May.

GDP for Q3 was revised higher. The adjustment was in line with expectations, but it does provide a higher base. Much of the gain was due to inventory adjustments (Diane Swonk). Doug Short has a great method for illustrating the components of GDP change over time, and also a post with plenty of other interesting comparisons.