The Week Ahead: Action Packed With FOMC, Auctions, And Data

On August 24th, we shifted our attention, for the most part, to the first two weeks of September as an action-packed and informative period of major considerations for financial markets.  This had to do with several factors including the relative absence of major considerations in the last week of August as well as the relative abundance of big-ticket events in the first two weeks of the current month.

With the first of those two weeks now a known quantity and with the important supportive ceiling of 1.67-1.69 still intact for 10yr yields, we now arrive at the second week of big ticket events with bond markets having erred on the conservative side of a wide potential range trade.  It's conservative in the sense that 10yr yields stayed between 1.55 and 1.68 most of the time never trying to break meaningfully above or below those levels established between the June and July NFP prints.  

Even without the knowledge that we're approaching this week from sideways trading patterns, we'd still hold the week in high regard for its market moving potential, but WITH that knowledge, the sense that trading is relatively calmer before the storm is increased.  That said, keep in mind that big-ticket events are all about potential energy as opposed to guaranteed movement.  In other words, there is a ton of market-moving potential in this week's events, but no guarantee we won't continue to trade in some new iterations of "sideways" until something comes along to change that.

The week builds to a crescendo on Thursday with the FOMC-related events and falls off abruptly after that despite an impressive line up of data on Friday.  Here's why..

The first big-ticket event of the week is the German Parliamentary court vote on the constitutionality of the European Stability Mechanism, or ESM.  This vote was largely seen as the wet blanket on Mario Draghi and the ECB, who may well have liked to announce something even more aggressive at last week's ECB Announcement but were seen as needing to wait for the CONDITIONS inherent in more aggressive monetary policy.  Draghi even mentioned that conditions would be forthcoming on the currently proposed policies. 

The German vote happens on Wednesday, leaving only one other major market mover in the FOMC events the following day.  Considering the general tenor of Fed-speak since the last announcement, as well as the minutes from the last meeting, markets quickly increased their expectations for imminent additional easing.  Last week's NFP "swing and miss" kept those hopes very much alive, and perhaps even increased them. 

Thursday offers the new FOMC Announcement itself, as well as the FOMC Member Forecasts and the Bernanke Press Conference.  Because the Fed doesn't do the economic projections and press conference with every announcement, Thursday's is one of two opportunities left to announce a policy change with the added benefit of being able to provide clarity via the press conference and edification via the member forecasts.  Granted, it's not impossible, but the Fed is less likely to "go big" in an announcement not juxtaposed with the other periodic FOMC offerings. 

That's really the crux of the week...  The buzz seems to be that the Fed does at least something.   The latest Reuters poll of economists showed a 15 per cent increase in the chances of a QE3 announcement on Thursday (from 45 to 60).  A majority of the economists surveyed think the program will be open-ended and an overwhelming majority expected the low interest rate verbiage in the Announcement to be extended past the current "late 2014."  The more of "that stuff" that happens AS EXPECTED, the better it likely is for bond markets.  To whatever extent the Fed holds off on Thursday, or comes through with MORE than expected, the uncertainty of market reaction increases exponentially.