Waiting for market-moving data

Outlook

We are still waiting for the market-moving data this week: ADP, GDP and the Fed. Of these, GDP is the biggie, not only because a surprise would be nice (more than 3%) but also because economists will pore over the details for clues to the shape of the recovery. The WSJ names five factors to watch: household con-sumption, business inventories, trade, business capital investment—and a revision to Q1, which may or may not occur.

The whispered idea that the Fed could upgrade the US outlook flies in the face of market expectations that the FOMC will be as quiet as it possibly can be, deliberately trying to keep conditions the same and not set off any taper tantrums or other kinds of hysteria. It’s not an illogical or left-field idea—Yellen did say the Fed will change its outlook as data comes in. But unless we are going to see payrolls at astronomical levels and structural changes in the composition of un-employment, a Fed upgrade would be premature. Having said that, economists are finally beginning to revise the de-mographics of retiring baby boomers to the “long-term unemployed” segment. A small twitch in the factor makes a huge difference. We could even start to see a labor shortage, and you know what that means for wages.

Overall, as we leave the field for a few days, we are struck by a mis-reading of risk in several different ways. The creep-ing rise of the US 2-year note yield means at least some players see the Fed’s first hike and it’s not clouded in the misty future—it’s almost upon us. We don’t know if and when the ECB initiates QE—possibly not until after the bank reviews are completed in October—but the Big Picture is US rates up, European rates down. This has been the case for many months and yet the euro is only just now starting to act like it.

Finally, emerging market investors should be shaking in their boots, not buying everything in sight. Nobody really un-derstands how financial market contamination works, but consider the recent past—Long-Term Capital, Russian bonds, defaults left and right. We fully expect Putin to announce retaliation for EU/US sanctions in the form of restrictions on oil and gas exports to Europe. It’s only the timing of the announcement that is in doubt. We don’t know whether Putin really does play chess, as advertised, but we guess he will drag it out as long as possible, announcing a horrible cut-off, without making threats ahead of time to enhance the effect. It will be a Shock, even if a first-year foreign affairs student can see it coming. How can this not fail to affect emerging markets everywhere? Another Russian default is probably in the cards unless there is a resolution, and we do not see Putin backing down, the only way Russia gets a good outcome.

We expect wiggles and setbacks, but on the whole, we like the dollar, for once.

Note to Readers: We will not publish any reports starting tomorrow (Thursday, July 31) to Wednesday, August 6. It’s the first time in over 20 years we will not cover the payrolls report. Remember: spikes, often two-way. Stay away.