We’re in the middle of the summer doldrums, and with so many investors on vacation, trading volume has been substantially lower than usual.
With less market liquidity comes more pronounced market moves, and with a tapering of quantitative easing potentially right around the corner in September (it’s now the consensus opinion on Wall Street), markets seem more sensitive to economic data releases than they have been in a long time.
Against that backdrop, Deutsche Bank chief U.S. economist Joe LaVorgna says there are two key events for markets this week: the release of the minutes from the Federal Reserve’s July FOMC meeting on Wednesday, and the release of the latest initial jobless claims data on Thursday.
In a note to clients, LaVorgna writes:
The data docket in the week ahead is light, but there are two main events worth noting: the minutes of the July FOMC meeting (Wednesday) and initial jobless claims for the August employment survey week (Thursday). At the time of the July Fed meeting we suggested the minutes could be more important than the actual meeting statement, because the former would shed greater insight regarding the breadth and degree of comfort among Committee members toward a September QE taper. Recent public comments from various policymakers suggest that even notable doves, such as Bullard, Lockhart and Evans, are comfortable with — but not yet committed to — the taper commencing at the September meeting. The lack of conviction for September largely stems from lingering uncertainty over the underlying health of the labour market and the broader economy. As such, the August employment report, which is released on September 6, is likely to be the defining event. Ahead of this, the trend in jobless claims will be closely scrutinized, given this series’ prowess as a payroll forecasting tool.
Last week we learned that initial jobless claims for the first full week of August fell to 320k — thereby pulling the four-week moving average 4k lower to 332k. Both initial claims and the 4-week average are now at pre-recession levels, and are therefore consistent with a faster pace of payroll gains than what we have seen over the past three months (+175k). Since 1990, 320k on claims has been consistent with approximately +230k on payrolls, the level of the 4-week is consistent with +200k. We currently anticipate another decline in the unemployment rate in August to 7.3% and +190k on payrolls; but if claims continue to surprise to the low side, the risks to our forecast could shift toward stronger performance. To be sure, broader economic fundamentals are coalescing toward a profile which should be consistent with faster hiring — possibly not in time for the August employment report, but quite likely over the next few months. In particular, growth is poised to accelerate at the same time that productivity remains sluggish.
LaVorgna expects the Fed to announce a reduction in the pace of the central bank’s monthly bond purchases at the September 18-19 FOMC meeting.
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