The Week Ahead: Economic Data, Fedspectations, and the Fiscal Cliff

The "week ahead" is perhaps better viewed as "the MONTH ahead," or at the very least, with an eye towards the events that may unfold over the next two weeks.  The reason for this is that those events occurring next week and potential through the end of the month, could go a long way toward informing (or restraining) the current week's trading momentum.  

As far as the "stuff" that's explicitly on the calendar, the "looming" event is primarily the FOMC Announcement next Wednesday (12/12/12), where the Fed is expected to extend Operation Twist.  There's no guarantee as to what that will look like exactly, but the consensus seems to be "open-ended" to the tune of $40 billion / month in Treasuries, on top of the open-ended $40 bln / month in MBS (not counting reinvestments from monthly payments).  The last Reuters poll had 27/29 economists surveyed expecting a continuation of Treasury buying.  Additional transparency via policy thresholds is another potential inclusion--if not explicitly stated--then perhaps at least commented on.  A day later, the Euro zone is set to write Greece's bailout check (agreed to last week, but still subject to parliamentary approvals among Euro zone states).

But it's what's not on the calendar that could have the most impact.  With the coming of December, the US is running out of time to "do something" about the impending automatic budget cuts set for January 2nd, 2013.  Clearly, this is the dominant issue facing markets for the next several weeks, but unlike the FOMC Announcement or the still important Employment Situation Report (NFP) this Friday, the critical information regarding the Fiscal Cliff won't necessarily adhere to a schedule (except in the event that a statement and/or press-conference is announced ahead of time).  Beyond that, all markets have to go on are the periodic sound-bytes from Congressional leaders and/or The White House.  Increasingly, those must be sifted through for importance, owing to a troublesome amount of political posturing.

Heading into Monday, the latest on the Fiscal Cliff can be summed up in one word: impasse.  The dangerous thing about an impasse, specific to MBS and mortgage markets, is that failure to resolve the Fiscal Cliff will be (or already is) increasingly priced-in.  In other words, trading levels reflect and will continue to reflect some level of expectation that the Fiscal Cliff is not resolved.  That essentially leaves any positive news as risking periodic negative shocks to bond markets, which at least could cause additional volatility--not the best situation for mortgage rates.

There's a somewhat substantial line-up of economic data this week as well.  This includes the manufacturing PMIs this morning with Markit at 8:58am and ISM at 10am.  Tuesday is empty, but things pick up on Wednesday, culminating with Friday's Employment Situation Report.  But with the Fiscal Cliff in the room, the data will have to speak rather loudly in order to motivate any organic movement.  We're very much back to a "watch and react" stance, characterized by the search for small victories and defensiveness.