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Monday, June 10, 2013

Stocks today will likely sustain the positive momentum from last week’s favorable jobs report. Stronger than expected overnight economic data out of Japan should also help sentiment and help ease worries about reversals in that country.

The economic calendar is on the thin side this week, with Thursday’s Retail Sales data the only top-tier report on deck. Attention now shifts to next week’s Fed meeting and the Bernanke press event. My sense is that stocks will aimlessly drift in the run up to the Fed announcement on Wednesday, most likely in the downward direction.  

Stock market investors interpreted Friday’s jobs report as QE friendly – not strong enough to prompt the Fed to start cutting back on its monthly bond purchases, but good enough to reassure about the economy’s growth momentum. The bond market interpreted the result differently, pushing benchmark yields higher, indicating that it saw the Fed moving towards tapering the pace of its bond purchases.

The Wall Street Journal article by Jon Hilsenrath Friday afternoon indicating no changes to the Fed’s view of the economy after the jobs report. Mr. Hilsenrath has a well-earned reputation for solid Fed sources - some would even say as an unofficial Fed mouthpiece – and his Friday report could very well be not that far from the central bank’s official stance.

We know that Bernanke & Co are concerned about the impact of the sequester and other tax changes on the economy. As long as they don’t see any material loss of momentum in the economy, along the lines of what we saw in Friday’s jobs report, they will be comfortable moving towards the ‘taper’ decision. The market’s positive reaction on Friday will only make it easier for them to move in that direction.

Sheraz Mian
Director of Research

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