Last week, the BOJ and ECB leaned dovish.  The Fed next week will probably complete the trifecta of Central Bankers leaning dovish.  What else can be expected when there are few signs of inflation?  And the growth data has not been great in the US, except for maybe employment.  The prospect of fiscal stimulus could have been a bonus, but that is looking less likely in the near future.

I had suggested previously that Yellen was a “scientist” and that she would start to question a rise in inflation after an extended time with no empirical evidence of a raise.  Yellen had indicated an uncertainty about inflation at her Congressional testimony, and we could see some downside risks (dovishness) to the FOMC statement on inflation.  We could also see some downside risks to the statement on the growth…

The next big shoe to fall could be the Fed questioning the strength of the consumer.  Retail sales has been weak for a number of months now.  The Fed had previously assumed that the growth in jobs would have translated into higher retail sales.  But we see none.  Again, any reasonable scientist would have to question whether jobs alone is enough to keep consumer spending rising.  This back-to-school shopping season could be critical for setting the tone for monetary policy for the rest of the year.  But this is just a (realistic) tail probability.  The central scenario for the FOMC statement should be a little-changed statement, with just minor tweaks.

If you had asked me a month or two ago, I would have thought we get the status quo July FOMC statement next week, and possibly some indication of a taper in September.  But inflation shows no sign of picking up (and is headed the wrong way), and I do not think the Fed can make a multi-year commitment like a taper, with no reason to remove stimulus.  The only exception would be if they somehow thought QE was causing market stability risks and they somehow became overly concerned with that, but this seems highly unlikely.  While they can still taper in September without signaling it next week, I think the Fed may want to see a couple of months of stability in inflation before moving forward.  This to me makes a taper in Dec more likely, with no hike this year.  A Sept taper could be possible if the data starts picking up, but there isn’t that much time to the September meeting.

Two weeks ago, the bulls got to enjoy the weak CPI and Retail Sales.  Last week, the bulls enjoyed the dovish-leaning ECB and BOJ.  Next week, we could see a slightly dovish Fed.  So it made sense for the bulls to be more confident and the bears be more cautious.  I think once the “anticipated dovish” event of the Fed is over, we can see if the bears start to re-establish themselves.  Otherwise, we could have a very slow fixed income summer, as new yield lows seem unlikely without further weaker data.  But that doesn’t mean there couldn’t be things to do…