Confessions from the Trading Desk: Coming Attractions…September Won’t Be Boring

For those involved in trading the fixed income markets, August is usually one of the more mundane months.  Issuance of new corporate debt slows down significantly since many global investment professionals are on vacation, forced two-week leaves, or holidays, which results in liquidity that is much more challenging.  But unlike past years, we’re entering into a September time frame that is poised to be anything but boring, thus causing a likely increase in volatility. So just like the coming attractions at your local movie theater,  this is what we have to look forward to in the month of September:

Specific events and their release date:

  • The Last Picture Show” (September 6) – On this Friday, the final major piece of the employment puzzle, the August non-farm payrolls, will be released to the market.  This will either confirm the prevailing wisdom regarding the underlying strength of the U.S. economy and the likelihood of tapering of the Fed’s quantitative easing program, or it will provide a difficult conflicting perspective only days before the FOMC meeting.
  • “The Godfather” (September 17-18) – The number of sub-plots that will be intertwined with this two-day FOMC meeting will be numerous…not to mention that this is the most anticipated meeting in quite some time because of the market’s perception that the FOMC’s exit plan for QE will be announced.  A $10-$15 billion taper of bond purchases by the Fed is what’s expected, but the major focus point will be any additional details regarding the speed and trajectory of subsequent reductions.
  • “Swing Vote” (September 22) – German Chancellor Angela Merkel is expected to win re-election on this date, a not-very-controversial outcome. The main concern among markets is that securing another term will embolden a more hardened German perspective regarding further European integration, regulation, and bailouts.

Events looming, but release date uncertain:

  • “The Chairman” – Will it be Vice Chairman Janet Yellen (“the dove”) or former Treasury Secretary Larry Summers (“the hawk”) for the Fed chair?  Or will a third-party-compromise candidate emerge?  Whoever the final choice is, they will get the privilege of overseeing one of the most difficult exits of monetary accommodation in history.
  • “Rising Sun” – Japanese Prime Minister Shinzo Abe will continue his three-front attack to revive the Japanese economy, with the focus shifting to the fiscal side and debates surrounding consumption tax increases combined with corporate tax reductions. Recent performance from the yen and the Nikkei Index has not been very helpful.
  •  “Mr. Smith Goes to Washington” – As the U.S. Congress re-emerges from its August recess, there are several debates simmering that will be significant for markets (debt ceiling, budget battles, tax and GSE reform, and immigration).  Which one will be most contentious and take center-stage is still up in the air, but my guess is the “grand bargain” budget battle.
  • “Fast Food Nation” – September is usually a very active month for new corporate debt issuance.  Over the last four years, average issuance in the month of September has been over US$90 billion.  Given all the preceding events and issues we have just discussed, how receptive will investors be to such a large influx of corporate debt? Especially if interest rate volatility doesn’t subside. And given the recent rash of shareholder-friendly activities.

So given this large slate of coming attractions, patience and diligence will be the key focal points for investors in order to weather a very busy September.  And having a large tub of popcorn and glass of your favorite beverage nearby may not be a bad idea as well.

 

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