Markets Already Bracing for Crucial Week by Ashraf Laidi 12/9/2005, Forexnews.com

Next week shall be the last full trading week of the year, but it will also be one of the most crucial if not most-data-event filled weeks of the year. In the US alone, markets will start off with Tuesday’s FOMC meeting and November retail sales, followed by Wednesday’s release of the October trade balance. Thursday’s quadruple treat of the November CPI, October TICS data on net foreign capital flows, November industrial production/capacity utilization and the December Philadelphia Fed survey should provide a market moving mix of data on external accounts, manufacturing activity and inflation pace. Friday’s release of the Q3 current account deficit should give a more comprehensive picture, but be ware of a one-time improvement in the report due to the payments by overseas insurers and unilateral transfers related to hurricane relief.

Next Tuesday’s FOMC decision should produce the 13th rate hike of the 18-month long tightening campaign but it is the wording of the FOMC statement that once again should capture the interest of the markets on the basis that the Fed may need signal a near-term conclusion to the campaign. The importance of communicating a discreetly conveyed a message rests on fine-tuning the bond market reaction, without causing a bullish stir in equities or provoke interest renewed rate-driven optimism into the housing market.
The first question in mulling the Fed’s statement is what reasons does the Fed have to signal a break in the current tightening? The second question is what changes should be signaled without the central bank placing itself in a policy bind from which it would be difficult to exit? Recall that the minutes of the November FOMC meeting triggered a broad dollar sell-off last month when they indicated that: “Some members cautioned that risks of going too far with the tightening process could also eventually emerge" and that “…policy setting would need to be increasingly sensitive to incoming economic data”

This article contains the following sections:

Will the Fed Change Tact

What we suggest

The ECB’s own version of “measured” tightening

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