Well, last week was fun. I even heard people talk about the 'Bernanke Put', bringing to memory those riotous years when Alan Greenspan would step in to do something nice so everyone's portfolios kept looking rosy. Of course, Mr. Greenspan did not really do that, and Mr. Bernanke did not either - but it was fun for the markets to pretend for a little bit. The reality though, is that the post-announcement rally is now over, and the focus is going to be on the economic news once again.
This week's U.S. data is not necessarily going to be the toppest-top-tier - but there is lots on the agenda that could rock your portfolio. Here is a glimpse of what's ahead on Monday:
The United States
We get two early-ish indicators from regional Federal Reserve Banks this week. Neither is usually a huge market mover, but each is a good indicator of what we are likely to get from the Institute for Supply Management (ISM) Index (which you will recall is now in contraction mode), and indeed from the broader economy.
The first is the Dallas Fed Index, which is basically a tally of business sentiment in Texas. The mood has been glum apparently: the Dallas Fed Index was at -1.6 in August, which was at least an improvement over -13.2 in July. It just might climb over the line into positive territory this month (although as far as I know, it was tallied before Mr. Bernanke's big save-the-economy announcement regarding QE3), which would be nice.
The index that I take a bit more seriously though, is the Chicago Fed National Activity Index (CFNAI) which measures activity not just in the industrial heartland but all through the U.S.. There are 85 separate indicators in the index, which to me suggests it is at least as a good a leading indicator as the more-market-moving U.S. Leading Indicator (which is put out by the Conference Board). At any rate, last time around the three month moving average CFNAI index was below zero for the fifth consecutive month in a row, and at -0.21 in July was below its reading of 0.18 in June.
I do not want to be an alarmist when it calls to signaling a U.S. recession (or downturn, or whatever term you find most soothing) but frankly if this index stays in the red, I would suggest it might be time to be a wee bit more defensive regarding stocks than you already are. Not because things are going to go crazy mind you: because you want to be ahead of the day when things do fall apart. Having said that, we are not seeing anything here that brings back memories of 2008: but below trend growth does not do much for profits either.
If you have stopped worrying about Europe, you really are not paying enough attention. Whatever band-aids have been applied the last few weeks, the situation everywhere but Germany is pretty much dreadful. That means that if Monday's German IFO Index is anything but lovely, it is going to mean a rocky start to overseas trading on Monday, and well, you know how that goes.
The good news is that the IFO will probably show a bit of a bounce. In August, the IFO Institute said that its survey of 7,000 executives yielded a confidence index reading of 102.3. That was down from 103.2 in July, and the fourth month in a row that the index declined. All things considered, it is unlikely to be five in a row. If it is, however, that will likely be a signal that issues in Asia are putting a damper on Germany - and that is going to mean trouble all around.
If the IFO Index moves lower, get set for a sharp shift in sentiment that will send the U.S. dollar higher, and give some lift to Treasuries. The equity markets are going to be another story though, so watch the IFO carefully.
If you have not been watching Australia, it is time you started and a good place to begin is with the Housing Industry Association (HIA) report for August. July marked the first time in three months that Aussie home prices slipped - in that case by 5.6 percent from July. Australian interest rates are still high by anyone's standards (the benchmark rate is 3.5% - scary high compared to the U.S., isn't it?) but there seems to be some room for a cut. Last week's minutes from the last Reserve Bank of Australia (RBA) meeting seemed to leave the door open for a cut, maybe as soon as October. That means that the Aussie dollar - which has pretty much been rising vs. the U.S. dollar since June - may be headed for a fall.
The RBA is watching China, but they are watching housing too, so be aware of the data if you want to wade into the market and think about shorting AUD/U.S..
The rest of the week:
For the rest of the week, there are a tons of things that might get everyone's attention - not the least of which will be Tuesday's S&P Case Shiller housing report. Housing data, and the durable goods report will round out the slate in the U.S., although there will be a couple of maybe-market-moving Fed speeches too.
Internally there is also lots to watch, starting with an inflation report out of Britain on Tuesday, Canadian retail sales data (will the Bank of Canada get bored of waiting for the Fed and raise rates all by themselves?), and what could be some truly scary economic indicators out of China.