Despite a weaker than expected job report and mixed messages from the Federal Reserve, the S&P 500 Index, the Dow Jones Industrial and Transportation Averages continued to make new highs last week. 

The Big Picture 

But with the earnings season drawing to a close, little in the way of economic data to drive the herd instinct and the last month of summer upon us, don’t be surprised if equities ad investors take a breather and assess where we are and what might spark the next move. 

Predicting what the Federal Reserve will do and when they’ll do it is a favorite pastime of Wall Street.  Add to the intrigue speculation over whom might be the new Fed Chairman, with Bernanke’s term ending January, 2014.  The controversial quantitative easing policies, in place since the financial meltdown of 2008, can’t last forever.  Indeed the Fed has signaled that they will “taper” purchases of mortgaged-backed and treasury securities as the economy grows stronger.  

Critics of the easy money policy complain it has artificially propped up equity prices and are looking for a correction if not a crash.  Others point to signs of economic strength that appear sustainable even without the Fed’s intervention.  One thing both factions can agree upon is that the Fed has promised to hold short-term interest rates at virtually zero for another two years and is prepared to remain accommodating even after the economy becomes more robust.   Markets, however, have moved the yield on the 10-year Treasury note to above 2.5% and could easily top 2.75%, a two-year high. 

Unrest in the Mideast continues to support the price of crude oil while safe haven buying helped gold bounce off of a two-week low.

I, Investor 

With a very light economic calendar this week, any comments by monetary policy makers will be gleaned for any hints of upcoming action.  

Next week things get busy.  Monday, August 12th sees the release of the July Treasury budget.  June showed a budget surplus thanks to an uptick in revenues, July should continue the trend of reducing the deficit. 

Tuesday sees July import/export prices, retail sales data and June business sales and inventory data.  Wednesday we get the producer price index for July while Thursday is the scheduled release of the consumer price index, a reading of inflation on the retail level.  It’s joined by the weekly jobless claims figure, July real earnings, industrial production and capacity utilization, August manufacturing readings from New York State and the Philadelphia Federal Reserve.  

Next week ends with July housing starts and permits, August consumer sentiment readings from the University of Michigan and preliminary second quarter productivity readings, all expected to show a slow but steady economic recovery. 

So right now, barring any unexpected global crises, flash crashes or other black swan events, the trend remains your friend.  Let the play unfold. 

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