PACKING IT ALL IN - So the week will basically come to a halt 24 hours early, with US markets closed on Friday for the holiday. Due to the shortened week, the economic calendar is stacked on Thursday, with the highlights coming in the form of the European Central Bank rate decision and monthly US employment report. While we could see a good bit of volatility from both event risks, it is likely more of the market volatility will be driven off US NFPs. I think market participants have already received all of the unexpected from the ECB in previous meetings, and now that a more dovish ECB guidance is priced in, I am not seeing too much risk for any major moves on that front.
BACKWARDS WORLD - However, there is room for NFPs to create a bit of a stir if the number comes out away from expectations (or even as expected). A softer result could open the door for yet another surge in US equities on the assumption this will push off rate hikes whenever they eventually do happen way down the road. On the other hand, a strong showing from the employment numbers could inspire the opposite reaction and open a wave of risk liquidation, particularly in equities, with the data further reinforcing the Fed's requirements for the reversal trigger. Such a backwards world we live in.
A MOVE IN THE RIGHT DIRECTION - I will say that coming from the hawkish side, I have seen some encouraging developments over the past several hours. ADP data out of the US was quite strong, and if this is any indication of what to expect from NFPs on Thursday, we could see another drop in the unemployment rate, taking us ever closer to that much needed (in my view) move towards sooner than later higher rates. Elsewhere, I was also delighted to see Janet Yellen at least start to concede the possibility of the threat of asset price bubbles and the need to use monetary policy as a tool to offset this risk to preserve financial stability.
I'LL TAKE WHAT I CAN GET - While Yellen wasn't going to go as far as to say there was an imminent threat to financial stability resulting from elevated asset prices, this was still a bit of a win for the hawks, as it let us know there is finally some recognition there actually could be a problem with incentivizing excessive risk taking through ultra accommodative monetary policy. Yellen was clear in explaining the limitations of macro prudential measures and that the use of monetary policy tightening as a tool to prevent bubbles was a possibility. Of course, we didn't see much of a bearish response from stocks post Yellen, but this market is so out of whack at the moment that it has a clinical phobia of falling down.