Today’s releases include the University of Michigan consumer sentiment index for August, expected to dip to 72.0 from 72.3 in July. Leading indicators are next, forecast up 0.2% in July after -0.3% in June. Attention is already turning to two weeks from today (Aug 31), when Fed chief Bernanke speaks at Jackson Hole. That opens the Labor Day weekend in the US, with markets closed the following Monday—a good time to delivers hints since everyone will have a lot of time to digest them.
The markets got very far ahead of themselves in revising assumptions about whether the Fed will engage in a third round of QE. The sum of the data pointing to restraint is skimpy, to say the least—retail sales, industrial production, inflation, even recovery in real estate. But the Fed has said all along that its mandate is boosting employment and we do not have good news on that one specific area, so presumptions of a less accommodative stance are really, really speculative. We say ECRI is probably right and the US remains in recessionary conditions, even if the official numbers don’t point to it (two quarters of contraction). Recession is a state of mind and a process, not a set of numbers. The political situation is not helping, with the GOP saying that public works infrastructure projects do not create jobs when obviously they do and that tax cuts will create jobs when there is no evidence this has ever been true. Mr. Bernanke has to be very careful at Jackson Hole.
If the US data is the basis of the current equity market rallies and the fall in the yen, but the data is misleading, we could be in for quite a resurgence of risk aversion when the wind blows the other way. Warning factors now in the background can rise to the forefront and smash animal spirits—for example, Spain just reported non-performing loans at banks at €164 billion and the special bank-bailout plan calls for €100 billion. Does that mean the bailout sum is insufficient, or what? We await the auditors’ report, too, which will be wider and deeper than just the Bank of Spain’s non-performing loan number. There are probably a dozen factors like this, any or all of which could overwhelm now-happy sentiment. Lining up and synchronizing all these different Event trajectories is hard, but on the whole, expecting every single thing to come out good is probably delusional. Maybe that’s why the euro is having a hard time topping 1.2400. In any case, it’s a Friday in August—just postpone any big decisions.
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