The week begins with QE2 narrative and will end with the strength of the US consumer.
Today, the FOMC releases the minutes from its last meeting and the market is looking for commentary on starting a new quantitative easing program. As I wrote last week, the markets are likely to be disappointed by the program. This shift may be occurring already with Janet Yellen's comments yesterday that, "It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system." KC Fed's Hoenig is to speak today and you can bet he won't be excited about QE2.
The best news is that Congress is out until November 15th, so little substantive bad news can come out from this group this week. I hope. The central issue will remain the elections, polls and what happens during the lame duck session. The twist will come from the investigations into foreclosures and the negative impact on banks earnings and lending.
The big player economists were out over the last week with mostly negative outlooks for the US economy in Q4 into Q1 2011. Therefore, the market expectations will be for continued weak economic data. This means that the market narrative for earnings this week will focus on worse than expected numbers. The NFIB survey shows a desire to expand the business via equipment purchases not hiring.
Since small business (500 or fewer employees) generated over 2/3rds of job growth during the last expansion, the NFIB numbers today show that this expansion will continue to be retarded by lack of from this group. As new economic Nobel prize winner Dale Mortensen explains it: The problem now is that many service-sector jobs are found in smaller businesses, "and they're finding it difficult to find financing from banks."
Next up, the inflation numbers will likely add to the negative tone as they should show declining inflation with the risk of deflation. Finally, we'll end up with US retail sales, Empire manufacturing and preliminary UofM consumer confidence that should show the economy has not yet fallen off a cliff.
The wild card for the week will be if China announces their US dollar reserve holdings. These should be over $2.5 trillion and will reignite the currency war theme for the markets. What's interesting is that China is diversifying their holdings into regional currencies which they compete against for trade. It could be one of the reasons the Japanese yen continues to strengthen against the US dollar.
The net: A likely profit taking week for long equities, short US dollars and mixed for bonds.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.