Havoc No More?

The G8 is meeting this week
Bernanke, as well, gets to speak
Will either present
A good argument
That havoc they no more will wreak?

Bernanke will “want to emphasize that a tapering of asset purchases is not a tightening of policy and isn’t necessarily irreversible,” said Michael Feroli, a former researcher with the Fed board in Washington and chief U.S. economist for JPMorgan.

I had to start with the comment I read this morning, which I think highlights why economists have a reputation for being out of touch with reality.  If asset purchases by the Fed constitute their Quantitative Easing policy, designed expressly to loosen monetary policy despite interest rates at zero percent, then how can tapering asset purchases, the opposite of executing them, not be policy tightening?  It is this type of muddled speaking and messaging that leads to market volatility.  As an investor, my concern is that either the Chairman doesn’t understand what the word ‘taper’ means, which I doubt; or that he is afraid to describe what he believes the Fed will need to do going forward.  It is the latter concern that will continue to drive markets for the time being.

So after several weeks of pretty significant volatility across all markets, the G3 central bankers are starting to figure out that market participants will not simply do exactly what is needed on the back of verbal cues.  In fact, Bernanke, Draghi and Kuroda need to enact policies very clearly and carefully, a level of precision that has always been difficult to achieve in the monetary policy realm, and one made even more difficult because of the unprecedented situation in which they each find themselves each having previously committed to, and enacted, extreme policy measures.  Once again, I will remind you all that as the current set of policies gets unwound, markets will remain quite volatile.

So let’s look at the markets this morning.  The dollar is mixed, with the yen weakening a bit, the Aussie rallying a bit, and emerging markets all over the map.  Equity markets are feeling better, with the Nikkei regaining 2.75%, Europe largely higher by more than 1% and US futures pointing to a higher opening.  Bond prices are mixed as well, with Treasury yields edging lower, but yields in Europe mixed and JGB yields higher.  In essence, we have no trends on which to hang our hat this morning, with each currency and product trading to its own internal issues.  In many ways, I feel this is the healthiest thing for markets, if traders and investors react based on data and news for each product.  But that is the hardest for any analysis to capture because of the disparate stories that exist.

The likeliest market movers this week are, in order, the FOMC meeting and press conference on Wednesday, any one of a number of pieces of US data to be released, and finally the G8 making some meaningful comments.

Here is the week’s data:

Today Empire Mfg


Tuesday CPI


-ex food & energy


Housing Starts


Building Permits


Wednesday FOMC Rate Decision


Thursday Initial Claims


Continuing Claims


Philly Fed


Existing Home Sales


Leading Indicators


I would expect that the Housing data have the best chance of driving a market move, if it misses in either direction.  And what of the G8?  It is hard to believe that given PM Cameron’s stated focus on Trade, Transparency and Taxes, that they will be saying things that impact FX markets greatly.  The Fed, on the other hand, will have much to say about where things go later in the week, and I will discuss that tomorrow.  For today, unless the Empire number is a big miss, the markets appear to be taking a breather from the recent market volatility.  On the surface, I still think the euro has difficulty rallying from these levels, the yen has ample opportunity to decline sharply by the end of the summer, and the pound has seen about all the good news it can handle.

Good luck