The Week Ahead: Guaranteed to be Interesting

From the moment the Fed officially began considering a reduction in asset purchases in late June, and even when unofficial consideration ramped up in May, it was the September meeting that stood the greatest chance to host the tapering announcement.  It even came up during Bernanke's testimony before the Joint Economic committee in late May when Rep Brady asked if the Fed could start pulling back "before Labor Day?" 

Since then, the consensus surrounding September has grown more official and more resolute--after more indecision in August when October-December or later had almost an equal number of votes.  To be sure, not all market participants believe the Fed will announce a reduction in asset purchases at the September meeting, but we do know two things about it.  Most market participants are planning on it, and it happens this Wednesday at 2:00pm Eastern.

Between now and then, there are a few tidbits vying for market attention, but none likely as juicy as Sunday's news that Larry Summers pulled out of the running to be the next Fed Chair.  Of the two frontrunners (himself and Yellen), he had been seen as more likely to take a harder line on QE whereas Yellen is viewed in a very Bernanke-esque light.  As such, bond and stock markets alike are rallying in the overnight session with S&P futures up just under 20 points and 10yr futures indicating yield equivalents in the 2.7's (we ended Friday at 2.89). 

NOTE: Japanese markets are closed for "Respect for the Aged" Day, meaning that cash Treasuries won't trade until Europe comes online.  This simply prevents overnight activity from affecting the standard 10yr yield and other parts of the Treasury curve, but there is relatively active volume in Treasury futures.

A lot can happen between now and the time domestic markets become active.  If 10yr yields do, in fact, remain in the 2.7's, it would speak volumes as to the relative importance markets are placing on 2014 as opposed to near term tapering details.  In other words, if the Summers withdrawal is worth that much of a rally on this week, then it would essentially confirm that markets are more interested in how and when QE3 is completely over compared to how much of it is removed or changed this week.