In a week chock full of crucial economic reports, the overall mood of the financial markets will depend heavily on there being no surprises.
“This is an important week — probably one of the most important of the year,” said Jeff Cleveland, senior economist at Payden & Rygel.
It is rare to have a Federal Open Market Committee meeting, a quarterly gross domestic product report and a major employment report all in the same week.
Each data set ordinarily would be significant on its own, but the fact that both economic growth and unemployment data play key roles in the Federal Reserve's monetary policy is particularly nerve-racking to some market watchers.
“Even if the market gets what it is expecting, I'm not sure it won't cause some kind of turbulence,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC. “People will be waiting with bated breath to see what the Fed says, because it coincides with two data points that are tied to the Fed's policy.”
Recent comments from Fed Chairman Ben S. Bernanke already have theoretically prepared the financial markets for a reduction in the pace of the five-year quantitative-easing program, which includes $85 billion worth of monthly Treasury bond purchases.
He has already indicated that he thinks that the economy is strong enough to justify a gradual tapering of the Treasury bond purchases that could start as early as September.
But the market, understanding the Fed's dual mandate of managing the nation's inflation and employment levels, could produce a knee-jerk reaction if this week's economic growth or employment data come in beyond the range of expectations.
Most economists are expecting the second-quarter GDP report to show a growth rate of about 1% for the first half.
Even though that growth rate wouldn't be a surprise, it could spark some market volatility related to the fact that it would mean the economy would have to be especially strong during the second half in order to meet the Fed's target growth rate of about 2.6% for the full year.
“If the first-half GDP growth is 1% on average, you will need a second half somewhere north of 3%,” Mr. Cleveland said. “One would think it would be difficult to talk about tapering of the quantitative-easing program in that environment.”
The non-farm payroll data scheduled for Friday is another data point that could produce some over-interpretation.
The consensus estimate is that the report will show a monthly increase of between 150,000 and 200,000 jobs, which is about in line with the average job growth over the past 12 months..
It is considered good news because it is growth, but if the growth continues at this pace, it will take until the end of next year before unemployment drops to below 7%, from 7.6% now.
“We're probably at the point where the market is somewhat digesting the fact that the Fed is going to taper, and we've gotten over the initial shock that it is coming sooner rather than later,” said Ted Wright, director of
portfolio management at Genworth Financial Asset Management.
“The markets have done exceptionally well this year while climbing a wall of worry, but it makes you wonder where we go if we continue to climb past those worries,” he said. “At some point, we'll see the market reacting on fundamentals, but right now, we're still very reliant on how we are still backstopped by the Fed.”
