At the end of a crazy market week, today’s focus could be on the European bond markets, given that risk premiums for the crisis countries have been increasing for some time. The comprehensive assessment release date is approaching, and doubts linger about the European Central Bank can achieve. Meanwhile the European Union’s willingness to pursue either austerity or a transfer union remains a question mark. Moody’s might announce a change to Spain’s sovereign rating (currently BBB, outlook stable), but I wouldn’t expect a shift to a negative outlook.
US September Housing Starts & Building Permits (12:30 GMT)
After a steep fall in August, housing data is expected to have recovered in September. The consensus forecast sees building permits rising to 1003,000 units from 998,000 in August, while housing starts are expected to rise to 1,000,000 from 998,000 in August, seasonally adjusted and at an annual rate. After steep rises during the beginning of the housing recovery, the rate of increase has moderated and remained fairly stable since 2013.
US consumer sentiment is strong. but well below the unsustainable lofty levels reached during the housing and IT bubbles. Photo: Thinkstock
Still, the closely-correlated series have had their share of ups and downs, and financial markets have had a tendency to overreact to temporary swings. Such reactions could be even more pronounced given that recent US economic data has recently failed to meet inflated expectations and the outlook outside the US has remained bleak.
Federal Reserve board of governors chair Janet Yellen speaks (12:30 GMT)
Janet Yellen’s speech is entitled Economic Opportunity, and it will be given at the Federal Reserve Bank of Boston Economic Conference on Inequality of Economic Opportunity.
It sounds reasonable to expect that Yellen will discuss labour market slackness and how the Fed will remain supportive of the economy in the long term, continuing the recent dovish calls from the Fed. Last Tuesday, San Francisco Fed president John Williams mentioned the option of delaying the first interest rate hike and, if needed, the possibility of new asset purchases. Yesterday St. Louis Fed president James Bullard stated that tapering of the Fed’s current monthly asset purchases could be delayed (see my earlier article for more).
This is either “talking the markets higher”, or real dovish forward guidance. The statements are a reaction to lower inflation outlook (the oil price is the main culprit), stronger dollar and deteriorating outlook, especially in Europe. The next meeting of the policy-setting Federal Open Market Committee will be on October 29 and 30. As usual, there will be no speeches given by Fed officials for a week before the event.
It is expected that the FOMC will announce another tapering, signalling an end of QE3 by the end of the year. But there is a chance the Fed will react partly for the good reasons listed above, and partly because it would make sense to look like a “numbers-based” central bank – unlike the European Central Bank, which seems much less independent at the moment. Of course, postponing October’s tapering to December would not make a big difference, but the markets could be caught by surprise, like they were in September 2013 when the Fed decided to postpone the beginning of the tapering process.
I expect the Fed to proceed with its preplanned tapering, but continue to make dovish noise. The Fed’s verbal interventions are effective enough, as its credibility remains high.It would only be forced to act if the markets were not doing the Fed’s wok. So expect the dollar strength to remain capped for now and bond markets to stay strong. Trading during the next couple of weeks should be interesting as markets second-guess the data. It seems that bad data is again becoming "good for markets", as it implies Fed action. Yellen’s speech can be watched live here.
US October Michigan / Thomson Reuters Consumer Sentiment (13:55 GMT)
After posting a big increase in September, the preliminary October preliminary reading is expected to give back some of the last month’s rise. Consensus sees the sentiment index falling to 84 from 84.6 in September, but still very near the post-crisis highs we saw at the end of 2012.
With other sentiment indexes already turning notably higher and employment showing continued strong growth, sentiment looks ready to move to new highs in the coming months. But it will not reach the lofty levels seen at the height of the IT and housing bubbles for a long time, so at least it cannot be said that current sentiment levels reflect overoptimism. 