Watching and Waiting
By Kim Rupert
Despite the usual anticipation, the June payroll report released July 6 will keep us waiting. Indeed, the employment report didn't really provide any new insights into the past, present, or future for the economy. Hence it didn't alter views on the Federal Reserve. That will leave the market grasping for clues, not only through this week, but for the next month as well.
There are no key pieces of data until Friday's retail sales and sentiment reports. And since there is still another complete cycle of data between now and the Aug. 21 meeting of Fed policy-makers, the markets will just have to keep on waiting.
WATCH THE MARKETS.
With no data until Friday's reports on retail sales, consumer sentiment, and producer prices, stocks and emerging markets are liable to remain the focus. Through the rest of the month we'll watch data on housing, production, inventories and prices, until the cycle repeats again in August heading into the Fed policy meeting.
Until we get more data, traders will have to monitor action in other markets, most notably stocks and emerging markets. Stocks sank like a stone on July 6 after a trifecta of warnings from tech leaders Advanced Micro Devices, EMC Corp. and BMC Software, combined with weakness from overseas shares and disappointment over the economy, weighed heavily on Wall Street.
Meanwhile, emerging market jitters are quickly becoming full-blown market panic. Emerging market currencies across the globe, especially the Argentine peso, the Turkish lira, the Polish zloty, and the South African rand took it on the chin late last week, hurt by difficulties with IMF funding, fiscal concerns, and political instability. With the 1998 financial crisis still fresh in traders' minds, Treasuries and the dollar will remain the main source of safety.
Participants in the weekly S&P MMS survey of Fed watchers contacted on July 6 were unimpressed by the June payroll figures, finding little new in the data but enough in the mix to satisfy both bulls and bears alike. And unfortunately, there was nothing outstanding in the numbers that gave either camp the edge in deciding where the economy is going from here. Hence, we continue to be left with an economy that is half-full, half-empty, or somewhere in between.
That is not a helpful environment for the bond market to establish clear direction. Hence, we look for choppy trading. However, we suspect that the general trend will be for lower yields, especially at the short end of the yield curve, within the context of a buy-on-dip mentality. With continued disappointment in the economy's recovery, a shaky stock market, and increased instability in emerging markets, the short end should lead Treasury yields lower.
MMS Survey results are consistent with this scenario. Data due out over the next several weeks point to an ongoing mix of modest gains in consumption and housing, weakness in production, all within a benign inflation environment. This should keep another Fed rate cut on the table. Indeed, 80% of those contacted expect another 25 basis point rate cut in August, but they aren't holding out for anything more.
Rupert is a senior economist for Standard & Poor's Global Markets