Capital Markets In the Week Ahead: It's Not about the Data

From Marc to Market:

High frequency economic reports will be not be among the key drivers of the capital markets in the week ahead. The light schedule, consisting mostly of industrial production in Europe, inflation for Scandinavia, and US retail sales, will have minimal impact on rate expectations.  

A November rate Fed move was never very likely.  The September employment report needed to be amazingly strong to boost the chances, and it was not.  To overcome tradition, and the logistical difficulty of arranging a unscheduled press conference, without word leaking out, a greater sense of urgency would need to be present.  Recent comments by the Fed's leadership, especially most recently Fischer and Dudley expressed no such thing.  

Our own calculation based on the November Fed funds futures contract that the market is discounting about a 7% chance of a hike on November 2.  The CME puts the odds a little above 10%, while Bloomberg has it at 17%.   The most important real sector data in the week ahead is the retail sales report.  Like the employment data, a solid even if not spectacular retail sales report is expected.  American households are not shopping like they did in Q2 when consumption rose 4.3% at an annualized pace, but a 2.8%-3.0% rate should be sufficient to lift growth above what the Fed now estimates as trend (1.8%).

German, French, and Spanish industrial output were released before the weekend, and each was better than expected, suggesting a robust aggregate report.  The ordoliberalism that Draghi acknowledges is part of the ECB's DNA does not see monetary policy as a tool to stimulate growth.  It is primarily to regulate the general price level.  

Draghi had also indicated that the asset purchases would not stop abruptly.  This meant it seemed that the ECB would decide to taper its purchases, like the Fed, did in QE3, rather than stop them cold. The press report confirmed that.  We are skeptical in reading any more into it.  There was no indication that the ECB was considering an early exit, and indeed, the original report acknowledged that the 80 bln euro a month asset purchases could be extended.  

We suspect there is reasonably strong chance that the asset purchases are extended beyond the current soft end date of March 2017.  Risks are still biased to the downside.  However, even if it decides to taper after March, that would still imply purchases all next year, and the likely need to modify its self-imposed rules to ensure minimal disruption via shortages of particular instruments. The least controversial measure may be to have the deposit rate (minus 40 bp) yield floor apply to portfolio averages rather than individual instruments....MORE