The Week Ahead: Retail Sales, Housing Starts and Fed Speakers Galore

With backs against the wall on Friday, and very much at risk of triggering a negative technical signal, bond markets battled back for their 2nd best closing levels of the week.  If they hadn't, it would have marked the first time since late 2010 that 10yr yields would have closed at 6 month highs for two consecutive weeks.  That may not have spelled certain doom for rates, but it was the more evil of two evils.  Instead, we got the lesser.

One of the biggest drivers of the broader sell-off has been the shift in tone among FOMC members made clear by the Minutes release on Jan 3rd (though the Fiscal Cliff Mini-Deal and the reasonably strong Employment Report on the same week didn't help).  To reiterate a point that's finally gaining some traction, bond markets didn't sell-off because they could somehow pinpoint a closer future date where the Fed would discontinue QE.  

Rather, the shift in tone was simply a milestone in the QE race.  Until those Fed Minutes, official policy communications, speeches, forecasts, and meeting minutes had all fallen on a continuum of EXPANDING ACCOMODATION.  But the minutes marked the first introduction of the mere concept of contracting accommodation.   Heretofore, it was a "buckle up and enjoy the ride" scenario without regard for how long the ride might be.  Quite simply, it was a reminder that QE does end some day and the Fed is starting to talk about it.  It doesn't necessarily have to mean that QE is going away sooner in order to spook bond markets.  It just has to suggest that the certainty of future cash-flows becomes slightly less certain, and it definitely did that.

Between now and then, we've had a few Fed speakers, but most have fallen in the more hawkish half of the spectrum (meaning that if you split FOMC voters for 2013 into two teams based on who is most and least likely to vote for QE continuation, most of the speakers have been those who have expressed more doubts and concerns about QE).  Monday changes that, with Bernanke (more dovish than hawkish) speaking at 4:30pm.  That doesn't leave much, if any time for his speech to move markets, however, and the following morning has plenty of economic data (Producer Prices, Empire State Manufacturing, and the important Retail Sales report).  

If markets read into something Bernanke says, specifically if we're left with the sense that the recent Minutes shouldn't be seen as turning point in policy stance, we could get valuable confirmation as to the relative importance that markets are placing on "Fedspectations."  This would be doubly true if the economic data was strong and bond markets still managed to hold their ground.

The remainder of the week is heavily peppered with other Fed Speakers, so Bernanke isn't the only show in town.  Though there's no economic data on Monday, every other day of the week has several reports except Friday, which sees only Consumer Sentiment.  Mid-week reports include NAHB's Housing Market Index on Wednesday and Housing Starts on Thursday in addition to Jobless Claims and the Philly Fed survey.