Committee for a Responsible Federal Budget

MARKETWATCH June 14-18

Jun 18, 2010 | Economics

Yes, financial markets too are being affected by the World Cup. So far today, trading is quiet – even though today is one of the famous Triple Witching Days (which is not about Harry Potter but the day each quarter when contracts in three main markets must be settled and which are famous for being unpredictable). Sometimes however thin markets can be volatile.

This week’s markets have been driven by increasing concerns over the strength of the U.S. economy. They have also continued to be buffeted by more back and forth from safe haven effects related to the ups and downs of eurozone fiscal developments. Yields at the longer end remain quite low.

On the US economy front: sentiment has shifted in recent weeks and markets are looking for data confirming signs of weakness. Most important were weak price data and weak/little change in recent unemployment claims, adding to worries from housing starts and retail activity.

In terms of safe haven ups and downs for the dollar and U.S. Treasury instruments: the eurozone got some surprising support from strong eurozone production news, even though the weak euro should be expected to stimulate EU exports. Also, on the ups and downs of the U.S. debt market as a safe haven: more fiscal consolidation plans were announced by EU countries – although markets are reluctant to give their approval to deficit reduction plans driven by perhaps “hair shirt” policies (to paraphrase a recent excellent column by Martin Wolf in the FT), seen as anti-growth. EU leaders appear poised to tighten up their fiscal framework – although agreement to a central fiscal authority still seems a gleam in the European Commission’s eyes.

And next week could be busy.

As always, more economic data (mainly from May) comes out next week (click here for the Treasury Department’s economic calendar). On the business side, we’ll see industrial production, durable goods, and producer prices. We also get the final normal revision of first quarter GDP, more housing data, the weekly unemployment claims, and some consumer confidence indicators.

The Fed’s Open Market Committee (aka the FOMC) meets June 22-23 (Tuesday and Wednesday). The FOMC will release its policy statement as usual mid-afternoon on Wednesday. The meeting comes at a critical time as real questions about the underlying strength of the economy are coming to the fore. It will also the time in which the Fed prepares for Chairman Bernanke’s semi-annual monetary policy testimony (and the Fed’s related report) before Congress in July and so the discussion and supporting background materials will be particularly in-depth.

Plus, a new wrinkle (based on still limited reports) is that private companies have started to return to market, to start competing again with Treasury debt. But it’s still quite early days – particularly given indications from the consumer and producer price data that companies don’t yet have pricing power. And we’ll see next week as corporate earnings start to be announced just how solid companies’ financials look now.