As the usual August lull is coming to a close, it is time to identify some key events for macro-minded investors to watch.
August 27-30: The RNC Convention
August 30-September 1: The Jackson Hole Economic Policy Symposium
September 3: Meeting of the EU Finance Ministers
September 3-6: The DNC Convention
September 6: Meeting of the ECB Governing Council
September 12: German Court rules on the legality of the fiscal treaty
September 12-13: Meeting of the FOMC
What to Expect
Modern political conventions are more spectacle than substance, but the RNC convention this year could move markets more than usual. Mitt Romney is expected to unveil a more comprehensive economic plan that integrates some of the ideas of his new running mate, Paul Ryan. This plan will provide guidance about what tax, healthcare and social security policies might look like in a Romney administration. All convention platforms are just proposals, so investors should take them with a grain of salt. However, if Romney decides to make a play for the Ron Paul supporters by integrating Dr. Paul's Fed audit plan into the platform, this could have substantive economic implications as explained in this article.
This symposium is likely to be the first big market mover of the autumn. Ben Bernanke is scheduled to speak on the morning of Friday, August 31. In previous years he has used this platform to float new policy ideas and test the waters for market reaction. Bernanke has five possible policy choices before him.
As examined in this article, the Fed's choices are (1) to stay the course and not engage in further stimulus, (2) provide some new transparency policy or guidance as a carrot to the markets, (3) float a new joint policy with the Treasury that looks similar to the British "Funding for Lending" policy, or (4) lower the rate the Fed pays to banks on excess reserves. The markets will react negatively to options 1 and 2, but more positively to options 3 and 4 since they are designed to stimulate lending. Despite continued uncertainty, it is extremely unlikely that Bernanke will pursue the widely discussed option (5), QE3.
In addition to Bernanke's big speech on Friday, Mario Draghi speaks on Saturday morning. Given the lack of ECB action after some tough talk by Draghi in recent months, his words are probably going to be less credible to markets, but they will carry weight since Europe is more reliant on stimulus right now than is the U.S.
Given that the German Bundesbank has announced a policy opposing ECB bond purchases, any announcement in this direction by Draghi is likely to be met with skepticism unless Germany reverses its position almost immediately. It is more likely that Draghi will discuss a policy of capping bond spreads or even absolute bond prices for countries in the eurozone. This will keep the costs of debt down for struggling nations, but it will also eventually force the ECB into bond purchases to maintain the desired debt costs. So, like many of his recent speeches, the essential part of Draghi's statement will likely be a plea to the international banking community to convince Germany to help him save the eurozone. Markets are likely to be optimistic about his plans, but skeptical that any action will be taken.
EU Finance Ministers Meeting:
The tone of this meeting will be set by Draghi's Jackson Hole speech. Investors should hope for news of a pan-European push for Germany to get on board with the ECB plans. However, if no such push ensues and Germany remains decidedly unconvinced, continued uncertainty in Europe will drive markets lower.
Like the RNC, this convention is more for show than substance. Investors should expect the President to use this platform to present a different set of economic policies than those of Mitt Romney. Beyond that, from an investor standpoint, the only other issue to keep a close eye on at the convention is any indication about movement to avert the fiscal cliff. Since the fiscal cliff is likely on hold until after the election, it is unlikely to see much attention paid to it at the convention.
ECB Governing Council Meeting:
This meeting is somewhat dependent on the ability of EU finance ministers to convince German leaders to support the ECB debt purchase plan. Assuming they are unable to convince the Germans (as has been the case for the last couple years), we should expect the ECB to make as bold a statement as possible about controlling debt costs and the future use of the EFSF. However, if the statement is not coupled with market action (as has been the case with the last couple statements by the ECB), investors will be wildly disappointed and markets will plummet.
German Court Ruling:
Like other western democracies, different branches of government hold different views on policy. This being the case, the odds of the German court deeming the EU fiscal compact legal is better than the odds of Bundesbank or German finance officials signing off on the fiscal treaty. Should they agree to this policy, at least one component of the ECB plan to stabilize the eurozone will be more secure, even if they can't directly engage in debt purchases. This will instill some confidence in markets, but will not make investors forget the problems associated with high costs of servicing debt. If the German court deems the fiscal compact illegal, it is one more sign that Germany is not willing to sacrifice to shore up Europe and make the EU survive. This would cause even greater uncertainty and sell-offs in European markets.
Bernanke's August 31 speech will give a solid indication of what type of policy we might expect from the Fed, but it may not provide much detail about when to expect that policy; the September FOMC meeting will provide a much needed timeline.
Due to political considerations around the November election, the Fed basically only has two choices about when to act, September or December/January. September is already pretty close to the election, so it is unlikely that the FOMC would start a huge new policy at that point, but they may make alterations to the guidance if that is what they hint at in Jackson Hole. It is more likely that we will see the FOMC make big policy changes around the New Year, but what policy changes are somewhat dependent on the outcome of the election. If Romney wins, option 3 (above) will no longer be available to the Fed since it requires a partnership between Fed and Treasury. This being the case, if Bernanke expresses interest in "Funding for Lending" at Jackson Hole, look for it to happen at the September FOMC meeting. Otherwise, we may be in for a bit of a holding pattern as the fiscal cliff approaches.
According to a recent survey by The Economist, global business leaders are increasingly pessimistic about the state of the economy. In April 2012, they found that only 5% more business leaders felt the economy was declining than thought it was improving. By July that number became 25%. With investment fundamentals decoupled from market trends, statements by policymakers over the next month will provide much needed guidance about what to expect in the market. It is extremely possible that for all the talk over the next few weeks, macroeconomic policies in the U.S. and Europe might not change at all. If this is the case, investors should expect a significant sell-off. However, with investors hanging on their every word, if central bankers and political leaders throw the markets even a small carrot, that might be enough to buoy markets through the rest of 2012, until we see more significant policy moves in 2013.