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Friday, August 31, 2012
Bernanke’s much-anticipated Jackson Hole speech will determine the outcome of today’s trading action. But with trading volumes expected to remain thin ahead of the long Labor Day weekend, it will probably be appropriate to not draw any firm conclusions whichever way the market closes today. Along those same lines, I am not reading much into the Thursday pullback either.
With the next FOMC meeting just two weeks away and the key monthly jobs report on deck for release next Friday, the Fed Chairman will likely stay away from making firm commitments, particularly on the central QE question. That said, he may decide to share his views on a key question that has been swirling around lately. And this pertains to his assessment of current economic conditions and the outlook for the back half of the year. This has become important following the relatively stronger economic readings since the last FOMC meeting.
The FOMC members appeared to have a pronounced dovish bias in the last FOMC meeting, but that was a function of their downbeat economic outlook. One could reasonably assume that the positive jobs report and a couple of other key economic data points after that meeting may have made the FOMC’s outlook less accommodative. The significance of next Friday’s August jobs report therefore increases significantly. I would think that a significantly sub-100K job reading next Friday will materially increase the odds of more Fed easing in the September meeting. On the other hand, a 100K+ jobs report will take the QE question off the table, at least from the September FOMC meeting.
It would make sense for the Fed to keep its ‘powder’ dry as the Fall months promise to unleash a number of destabilizing forces for the U.S. economy. The Euro-zone question was on summer vacation this month, but will likely be back at ‘work’ with full vigor next month. Many expect the ECB to come out with a detailed bond-purchase program at their meeting next week. But given continued German opposition, it is hardly certainty at this stage. On the home front, the ‘Fiscal Cliff’ question will remain unaddressed in the noise of the election season. Another round of Fed QE will have little relevance to the economy’s current growth trajectory. But it could be useful in an environment where the European or the ‘Fiscal Cliff’ issue has seriously escalated.
As such, those hoping for clear signals or prompt action from Bernanke today will likely be disappointed. A lot is riding on next week’s data, particularly Friday’s August jobs report, which will likely keep stocks in tentative mood.
Director of Research
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