Next week is needless to say a big week. We will have key economic data released in the US, highlighted by the 1st cut of the Q3 GDP, the Chicago PMI, Construction Spending, and the Employment Cost Index for the 3rd quarter on Wednesday, October 31st. On Thursday there is Personal Income, Personal Consumption, and the Core PCE Deflator, along with the ISM Index for October. Friday brings the all important Non Farm Payroll.
In addition to the economic data, the Fed will announce its decision on Interest Rates on the 31st. Expectations are for a 1/4 point decline in the Fed Funds Rate. This is mainly due to the continued weakness in the housing market which has led to 10.5 month supply of homes on the market, projections of increase foreclosures which has the potential to pour fuel on the housing fire, and the expectations of lower domestic demand as a result of the housing situation. All of which could lead to higher unemployment if demand slows too much.
The Fed has to protect against this. They have little choice. However, they may include a statement which indicates that the move is purely precautionary and indicate strongly they will wait and see. As much as the fed doesn't want the economy to fall into a recession, they also do not want to see the stock market get overheated, credit too cheap and the dollar from falling out of bed. It is a fine line the Fed has to walk, so they have to be careful.
The obvious bright spot in the economy is the performance of the those firms which deal overseas. The dollars decline has kicked in, inflating overseas earnings as a result of unhedged currency gains on overseas profits AND increased sales due to being more competitive overseas, increasing exports. In addition, the cheaper dollar will also help attract foreign visitors to the US over the Holiday Season. You can argue that US retailers may make it through the Holiday sales season as a direct result of foreigners coming to the US to take advantage of the cheap dollar, and cheap prices due to slack domestic retail demand. It could be a sales bonanza for foreign shoppers.
We are in interesting times. At the same time that we have a real estate market and credit market, that can lead to an economic disaster, we have hope due to a cheaper dollar which can keep corporate profits and even domestic retail sales semi strong. The combination probably points to choppy markets with the dollar tilting toward a softer tone. However, in between, we could see volatile movements with illiquid trading conditions.