Week Of Clues For Fed Taper

This week there are a slew of Central Bank Policy announcements. Starting with tomorrows Reserve Bank of Australia, followed by the Bank of Canada, Carney’s “Old Lady” and Draghi’s European Central Bank. It’s a busy first week for December as manufacturing, services and composite PMI indices from Asia, Europe and the U.S. will also give the market its measures of economic health. Among the many other data releases are Q3 GDP for Australia and the Eurozone. To top it all off, we have the November employment report for North America. Investors continue to look for ‘hard’ evidence that a December taper is a possibility in a few weeks. With a strong non-farm payroll report will Bernanke and his crew have the will to ease their foot off the quantitative pedal by paring some of their $85b bond-buying program?

Governor Stevens at the RBA has been the most active of current Central Bankers over the past month, highlighting how his economy is apparently “running on fumes” and how the AUD is very much overvalued. His dovish tones have certainly put the domestic currency from down under on the back foot. But, is that enough? Overnight Aussie data was both mixed and somewhat positive, as manufacturing fell into contraction, building approvals fell but less than expected, while inflation metrics improved but remained well within the RBA’s target range. After all the hoopla, the RBA is widely expected to stand pat at +2.50% in its decision tomorrow.

Keeping in touch with their regional partners is the BoJ’s governor Kuroda, who reiterated that additional easing was still possible if economic risks materialize. Perfect timing now that the approval rating for PM Abe’s cabinet has fallen below -50%. Governor Kuroda does not think that risks from the sales tax increases next year pose too much of an economic threat. He attributed some of the improvement in Japanese corporate profits to yen weakness. Kuroda knows that it’s important for the forex market to remain stable. Capital Markets should expect the BoJ to remain vigilant that any currency weakness is orderly.

It’s been awhile since we had such a heavy slate of data Stateside. Depending on how this week transpires, expect many of the market participants to begin winding down some of their positional holdings for the holiday break. December is notoriously a month where both liquidity and volatility are sometimes pushed to the extremes. It certainly provides an opportunity for some, but more likely, an excuse for the majority of investors to step to the side. Depending on how the US data plays out the Fed could be rather busy.

The market expects US ISM-non manufacturing on Wednesday to improve, along with a favorable print for Novembers ADP. The market should be aware that there has not been a consistent bias between ADP and NFP of late. The Fed’s next Beige Book is being prepared for the December FOMC meeting, a two-day affair on the 17-18th. Some corners expect “moderate” growth to be announced on Wednesday. If so, this would be an upgrade from previous reports indicating “modest-to-moderate” growth. Perhaps this could be a clue to expect a December Taper? As this matures expect the majority of the market to begin positioning itself for a better November employment report. If so, this should favor the dollar outright as a better than expected manufacturing reading combined with a solid employment report will very much back the Fed to ease some pressure on that pedal of theirs!

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