Week Ahead: The German Constitutional Court Decision!
Stock Market: Economy -- FOMC Meeting and Stimulus?
by Ian Harvey
September 08, 2012
The week ahead is not crowded with a lot of economic or earnings reports, but the two-day Fed meeting is the big event in a week that includes some important economic data. Retail sales data Friday is likely to show consumers increased spending in August, but inflation data could show that some of what is being purchased is just higher priced gasoline.
The two economic events which will determine market direction will be:-
The Fed will announce its decision late Thursday morning, and Chairman Ben Bernanke will hold a news conference at 2:15 p.m. ET.
• The German Constitutional Court decision on whether the country can legally get involved with all the European debt resolution plans on Wednesday. The betting is the court will support the participation.
• Second is the FOMC meeting, which starts Wednesday. It will end Thursday with a decision on whether to do another round of stimulus. It will probably include the Fed's vowing to keep interest rates at "exceptionally low levels" into 2014.
Therefore, expect this week’s markets to be especially vulnerable to some wide swings. Last week’s strong action has improved the technical outlook, which had deteriorated in August, but it is still not looking as strong now as it did during the fall of 2010 or 2011.
'Federal Open Market Committee - FOMC' is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms.
The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does by buying and selling government securities. For example, to tighten the money supply, or decrease the amount of money available in the banking system, the Fed sells government securities. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.
Earnings in the Week Ahead
On Wednesday tech giant Apple (AAPL) is expected to unveil its next model iPhone, apparently dubbed iPhone 5. Apple has been on a roll recently, both the company and the stock. A successful launch of its latest version of the smartphone could extend Apple’s dominance of the lucrative mobile technology market.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%|
Economy in the Week Ahead
The last two days of the week are likely to carry the most weight in terms of the economy. On Thursday, we have the jobless claims and Producer Price Index, followed by the FOMC announcement.
The Consumer Price Index is out Friday along with Industrial Production, and the August data on Retail Sales which were up in July for the first time in four months. Also being released is the mid-month reading on Consumer Sentiment from the University of Michigan which may be impacted by last Friday’s jobs report.
Consumer spending is an important force for the economy in the last part of the year and the retail sector is typically seasonally strong from September through Christmas.
The National Federation of Independent Business will release its Small Business Optimism Index on Tuesday. On Wednesday, import and export data will be released, providing a look at inflation.
Meanwhile, the European Central Bank’s announcement Thursday of the past week, of a bond-purchase program aimed at lowering borrowing rates for cash-strapped countries helped give a lift to risk assets, and the focus now shifts to a German court ruling Wednesday on whether Europe’s ESM bailout fund is constitutional.
Here is a brief list of some of the key events in the week ahead.
All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Earnings: Casey's General Stores (CASY), Shuffle Master (SHFL), and Titan Machinery (TITN).
• 3:00 p.m. Consumer credit
Earnings: Globecomm Systems (GCOM), Hanwha Solarone (HSOL), and United Natural Foods (UNFI).
• 7:30 a.m. NFIB small business survey
• 8:30 a.m. International trade
• 10:00 a.m. JOLTS
• 1:00 p.m. $32 billion 3-year note auction
Earnings: Pall Corp. (PLL) and Spartech (SEH).
• Fed begins two-day meeting
• German Court rules on ESM
• 8:30 a.m. Import prices
• 10:00 a.m. Wholesale trade
• 1:00 p.m. $21 billion 10-year note auction
Earnings: Analogic (ALOG), China Finance Online (JRJC), and Pier 1 Imports (PIR).
• 8:30 a.m. Initial claims
• 8:30 a.m. PPI
• 12:30 p.m. FOMC statement
• 1:00 p.m. $13 billion 30-year bond auction
• 2:00 p.m. Fed economic forecast
• 2:00 p.m. Federal budget
• 2:15 p.m. Fed Chairman Bernanke press briefing
Earnings: There are no major earnings reports on the schedule.
• 8:30 a.m. Retail sales
• 8:30 a.m. CPI
• 9:15 a.m. Industrial production
• 9:55 a.m. Consumer sentiment
• 10:00 a.m. Business inventories
Reports for the Economy to Watch in the Week Ahead
• It is not expected that any of the data ahead of the Fed meeting will have a significant influence on the stock market, but it is important to watch consumer-related sales and inflation data at the end of the week.
• What will be most interesting and most important for GDP will be the retail-sales report that come out Friday — as well as the CPI report. There is an expectation that the CPI is going to show an 0.8 headline rise, which is going to be a kind of counterpoint to the (Fed) easing, when you get that kind of rise the next day. But that will be mostly gasoline which the Fed doesn’t focus on. One criticism of QE is that it causes inflation, as investors buy commodities, and the dollar weakens.
• Expect headline retail sales to show a 0.7 percent gain, in part from car sales and gasoline. Core should be up 0.3 percent. Consumer spending seems to be picking up in the third quarter along with GDP growth. Expect 2 percent GDP for the second growth but at the moment it is tracking a little higher at 2.3 percent.
The impressive gains in the stock market last Thursday combined with the weaker than expected jobs report on Friday has convinced many that future easing by the Fed is indeed a certainty. Of course, historically this is a very positive sign for stock prices and, for many months, the stock market has been looking for prices to move higher into the end of the year.
However, given the historical patterns, it is likely to be a bumpy ride going into the end of the year. During election years, volatility has been high in September, and the ECB plan still faces some hurdles with the ruling from the German constitutional court due on Wednesday. Though German Chancellor Angel Merkel has supported the plan, many in Germany, including the Bundesbank President Jens Weidman, does not.
Other Important Articles Relating to the Week Ahead