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Tentative Market Ahead of the Fed, GDP, and Jobs

Sheraz Mian

Monday, July 29, 2013

The tentative pre-open sentiment today is likely a sign of things to come this week given the heavy economic calendar, with GDP, Fed, and jobs reports coming out later this week. On the earnings front, the reporting season is past the halfway mark. What we have learned thus far is that while earnings aren’t terrible, they fail to provide sufficient justification for the market’s current level either.

The FOMC meeting this week is not expected to provide any fresh headway on the QE question, but that is the big issue for this market. Bernanke & Co have been successful in reassuring the market that they plan to keep short-term interest rates at current levels for a very long time even after they start pulling back from the QE program.

These assurances helped stall the scary looking uptrend in long-term interest rates that appeared to be threatening the housing recovery. Housing related stocks have yet to recover from the shock of the interest rate move since May, though we haven’t seen any evidence yet that the rise in interest rates thus far has had a material negative impact on the sector beyond refinancing activities.

Related to the Fed issue is the Q2 GDP report Wednesday morning and the July jobs report on Friday. Of these two, the GDP report could be the more interesting one as in addition to growth numbers for the second quarter, GDP data going back many years will get revised. As we saw in 2011, sometimes these GDP revisions could throw up many surprises.

The economy isn’t expected to show much growth for Q2, with the GDP number expected to show a sub-1% growth pace. But the expectation is for the growth pace to start getting better from Q3 onwards. We have yet to see any evidence of this expected improvement, but that’s the view underpinning consensus expectations.

Sheraz Mian
Director of Research

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