The Federal Reserve will be at the center of attention this week and it has already grabbed headlines. Larry Summers withdrew his name from contention for the top job at the Fed, leaving the door wide open for Janet Yellen, unless President Obama makes a wild card pick.
This development led some forecasters to call for a dip in the 10-year Treasury rate because Summers was seen as the leading candidate and also a monetary hawk, relatively speaking. When a Japanese paper reported he was Obama's choice for Fed chair last week, the U.S. dollar and interest rates moved higher on the news. With him out of the running, the eventual choice, most likely Yellen, is seen as being more in favor of quantitative easing and other extreme monetary policies. Summers had been slightly critical of QE, saying the effect on the real economy (as opposed to asset markets) was limited.
As it stands today, the general consensus is for the Federal Reserve to announce a reduction in asset purchases the tune of $10 billion. The next most popular prediction is for the Federal Reserve to do nothing. Most forecasts are based on the economy, however, and not the nuts and bolts of the asset purchases themselves. One reason why Bernanke may have announced the taper when he did was because the federal deficit is falling. The U.S. budget deficit is several hundred billion dollars below last year's forecasts and if the deficit continues falling at the current rate, at $45 billion a month in purchases, the Fed will buy nearly all of the government's new Treasuries in the coming year.
In fact, if the economy picked up a bit and tax revenues climbed a bit faster, the Fed would be buying more than 100 percent of all new treasuries, leaving nothing for banks and foreign central banks. This is important because foreign central banks use these bonds as reserves, while the financial system uses treasuries as collateral. A shortage of bonds would create unpredictable consequences in the global financial system. In other words, we would be very surprised if the Federal Reserve didn't reduce Treasury bond purchases this week.
Big Picture: The CPI, housing states and industrial production numbers are all out this week, but they will be overshadowed by the Federal Reserve Open Market Committee policy meeting that ends on September 18.
Earnings: The lull in earnings reports is passed and we're starting to heat up again. Things don't really pick up until October, and technically these reports belong to the prior quarter, but because they're so close to the October reporting period, whatever trends they show tends to be a preview of what's coming.
FedEx (NYSE:FDX) and Oracle (NASDAQ:ORCL) report this week. Both firms suffered big hits to their share prices when they reported in June, delivering negative reports amidst a period of negative sentiment. These firms are important for the transportation and technology sectors, with FedEx also watched as bellwether for the broader economy. Still, both firms had negative reports previously, for mainly company specific reasons, and beyond their impact on various indexes and funds that hold them, they did not impact the broader market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.