The Day Ahead: Painfully Limited Calendar Leaves Focus on Fiscal Cliff

Monday saw a moderate amount of Fiscal Cliff headlines without much by way of market reaction, especially in bond markets.  MBS and Treasuries were both almost completely flat from Noon on, despite the fact that Republicans floated a proposal which was subsequently rejected with White House officials saying that the proposal failed to address the issue of raising taxes on the wealthy.  A Reuters story (read it HERE) suggests that White House officials view the ball as being in the GOP's court until they agree to such tax increases.

The well of scheduled data is effectively dry on Tuesday with no significant reports scheduled and no major overnight anticipations for Europe or Asia.  In fact there's painfully little to look forward to other than scheduled Fed "Twist" buying from 10:15-11:00am.  This leaves the focus even more squarely on the Fiscal Cliff, a fact that's made more challenging by the increasing level of skepticism with which the topic is viewed.  

It's not necessarily that markets are skeptical of the possibility for a resolution, but rather, simply skeptical that any given sound-byte is anything more than political gamesmanship.  Markets quickly learned their lesson that not every statement from every congressional leader or White House aid was worthy of a big market reaction and we're left with a heavy lifting requirement that can only be filled by big developments.

With that in mind, there's no guarantee that such developments will necessarily transpire in today's session.  If they don't, then it's hard to know where the focus will be, and whichever headline speaks the loudest will have a good chance of competing with tactical positioning ahead of the Wednesday-Friday stretch that brings a majority of the week's data.  Then, the following week will see the FOMC Announcement, and to that end, Fed Voter Tarullo's comments at 10:45am today MIGHT get some attention.  In general, however, markets have a reasonable consensus as to the shape of Operation Twist's extension, and any Fed Speaker between now and next week would have to blow the lid of a tightly held secret in order to change that consensus.