The week ahead is loaded with data reports and earnings news. The FOMC has another meeting and rate decision. It occurs in the context of a nice stock rebound. The punditry will be asking:

Will the Fed put the brakes on the breakout?

Prior Theme Recap

In my last WTWA I predicted that the market story would turn to housing, the subject of most of the week’s data. That proved to be one of my worst predictions! My discussion of the theme is intended as preparation for the media focus, not just my own opinion. My personal conclusion was that the housing story was important, but others did not think so. It did get reasonable attention, but earnings stories dominated, with secondary attention to Europe and China news. By Thursday, it was all about the market breakout and getting back to breakeven on the year. To get the full story, let us look at Doug Short’s weekly chart. You can clearly see the mid-week turnaround. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

While I take a weekly focus, Doug’s update 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

We have a huge economic calendar, with more important reports than we have seen in many weeks. Whenever the week includes a Fed meeting, we expect that to command attention. While most do not expect a policy change, it remains possible and could dominate market discussion until Wednesday afternoon. Much of the most important data will not be known (even by the Fed) until later in the week. This is a perfect setup for pundit pontification!

I expect a week-long Fed focus, with everyone asking:

Will the Fed put the brakes on the breakout?

The question implies two parts:

  • Will Fed policy change?

    1. Yes. A rate increase would merely move toward normal.
    2. No. There is no sign of inflation and economies are weak. (Noah Smith at Bloomberg View and Paul Kasriel of Norther Trust).
    3. No. It would create too much dollar strength. (Bloomberg)
    4. It is too late. The Fed should have acted when the economy was stronger.

  • Does it matter?

    1. Yes. The market strength rests upon worldwide liquidity. Changing this could halt the rally.
    2. No. It is all about technical analysis and which wave we are in. (Avi Gilburt at MarketWatch).
    3. No. Fed policy has done little to help the economy, so gradual cuts will make little difference.
    4. No. The economy is strong enough to deal with higher rates. (Christopher Swann, CNBC).

    • There are sources taking each of these positions. I expect all to be cited in the week ahead.

    As always, I have my own ideas, reported in today’s 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

    The news of the week was mostly good.

  • Government shutdown less likely. The apparent choice of Paul Ryan as House Speaker is a good signal on this front. Investors who join me as political agnostics should not care about the partisan issues, just the consequences. We know that the market hates the uncertainty brought on by a debate over raising the debt limit, so this is good news.
  • Jobless claims. The lowest four-week moving average since 1973. (Calculated Risk)
  • China GDP beats forecasts benefiting from stimulus. (Bloomberg)

  • Central bank policy. China took aggressive action, but ECB President Mario Draghi needed only words. Paul Vigna of the WSJcaptured the essence of the story in a few words:

    First there was the Fed, which backed off a rate hike in September, and seems unlikely to implement one at all this year. Earlier this week, the ECB chimed in, with President Mario Draghi dropping tea leaves the size of tires that the bank could and would expand its stimulus program later this year, if needed. Lastly, the PBOC joined the parade overnight. The People’s Bank made two powerful moves: it cut interest rates by 25 basis points, and cut the reserve-requirement ratio for banks. The ratio dictates how much money banks need to keep on hand. Cutting it is viewed as a very blunt and powerful way to push money into the economy. They needed to do something. China’s third-quarter GDP report was its worst showing since 2009, and most people think the real growth picture is even worse.

  • Housing data were strong. Calculated Risk reported updates and additional commentary on each report.

    • Existing home sales
    • Builder confidence
    • Mortgage applications
  • Earnings beat rate. 77% of stocks are beating reduced expectations. (FactSet)
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