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Ahead of Wall Street

Thursday, August 1, 2013

Favorable data out of China and follow through from the Fed’s relatively market-friendly statement from Wednesday provide the favorable backdrop for today’s trading action. While some tentativeness ahead of tomorrow’s jobs report will be understandable, but one would reasonably expect the stock market today to sustain the positive pre-open mood throughout the session, particularly if the ISM report comes through as expected.
The Fed statement was broadly market friendly as it cracked the door open to delaying the ‘Taper’ from September to perhaps December or even early next year. The Fed appeared to be downgrading their economic growth outlook a bit and pointed towards low inflation readings and the rise in mortgage rates. A natural offset to those trends would be for the Fed to not do anything on the QE question, at least not any time soon.

GDP growth has undoubtedly been tepid and even the housing recovery could be at risk from the rising interest rates. But labor market data has broadly been positive, as this morning’s weekly Jobless Claims numbers and Wednesday’s ADP report showed. A positive jobs reading in tomorrow’s BLS report, say something close to 200K, will further magnify this apparent disconnect between the labor market and GDP numbers. The question in many people’s minds, including the Fed, could very well be which set of data is more accurately reflective of the economy – GDP or jobs. The market’s hope will be that a continued goldilocks type of positive jobs and underwhelming GDP numbers keeps the Fed in its QE business for a long time to come.

This debate about the timing of ‘Taper’ notwithstanding, I strongly feel that it is coming. If it’s not in September, then it’s most likely in December. But there is no doubt in my mind that the Fed is itching to get out of the QE business.

Sheraz Mian
Director of Research

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