Government Roadblocks Ahead?
Amid concerns about an October government shutdown, House Speaker John Boehner announced that he would resign his position next month to avoid leadership turmoil. While many analysts believe that his departure reduces the risk of an October shutdown, it could increase the risk of an end-of-year standoff. Republicans and Democrats are squaring off again over fiscal policy and the added drama of next year's elections could cause the fight to drag out to the end of the year.[i] Will the Fed have to consider Washington politics in its rate decision? We'll see.
Fed Clarifies Rate Thinking (Somewhat)
Federal Reserve Chairwoman Janet Yellen clarified the Fed's position on rate hikes in a speech on Thursday. She emphasized that the Fed is likely to raise rates this year, and that she is personally committed to that strategy. However, the decision will continue to rely on economic data and a rate hike is not yet certain.[ii] Her statement adds much-needed context to the Fed's decision to keep rates steady and will hopefully give investors more certainty this week. However, as I've said many times lately, short of announcing QE 4 I don't think the Fed has much bearing on what happens in the near term. Janet Yellen is speaking on Wednesday but I'm not sure anyone cares anymore as anything she says could end up to be more negative than positive at this time.
Q2 Growth Accelerated to 3.9%
We also got our final report on second-quarter economic growth, which showed that Gross Domestic Product (GDP) grew faster than originally expected. The revised data shows that the economy grew at an accelerated rate of 3.9% last quarter, driven by stronger consumer spending and construction.[iii] Hopefully, the increased pace of consumer spending - which drives two-thirds of economic activity - held into the third quarter.
Week Ahead Packed with Data
Looking at the week ahead, analysts will be closely watching the September jobs report, which could sway the debate on interest rate hikes one way or the other. Investors will also be watching Washington to see how Boehner's resignation will affect the budget battle. All of this is likely to add up to bad news really being bad news. We will continue to see a mixed picture but a continuation of the softness in the economy continuing to show. And not too far off in the distance will be the earnings reports. While earnings remain somewhat stable, the big misses appear to be happening in revenues. Forward-looking guidance on 11 companies out of the S&P that have reported so far this month suggests there are some issues developing in the background.
It appears that China really does matter and that we are likely to continue to see softness in the next several quarters looking ahead.
This week promises plenty of headlines for markets to digest.[iv]
Monday: Personal Income and Outlays, Pending Home Sales Index, Dallas Fed Mfg. Survey
Tuesday: International Trade, S&P Case-Shiller HPI, Consumer Confidence
Wednesday: ADP Employment Report, Chicago PMI, EIA Petroleum Status Report, Janet Yellen Speaks 2:00 PM ET
Thursday: Motor Vehicle Sales, Jobless Claims, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Friday: Employment Situation, Factory Orders