Fed could be a surprise catalyst for the markets in holiday week

The quiet holiday week ahead could hold some fireworks for investors if the Federal Reserve reveals its thinking on its bond buying program.

The four-day trading week could see stocks drift, after hitting new highs this past week. The closely watched 10-year Treasury yield has held under 1.5%, a positive for tech which outperformed with a 3.2% gain for the week.

There are very few economic reports of note, aside from ISM services data on Tuesday. But the Fed’s minutes from its last meeting will be released Wednesday afternoon, and there is potential for the market to learn more about the central bank’s behind-the-scenes discussions on winding down its quantitative easing program.

“Our base case is that rates drift higher, but in order to that get that move higher you need a catalyst to get there,” said Brian Daingerfield, head of G10 FX strategy Americas at NatWest Markets. “Either the Fed has to move forward aggressively on tapering, or you have to get the data really rocking, and you don’t have either.”

Friday’s report that 850,000 jobs were added in June was better than expected. However, the unemployment rate missed expectations after rising by 0.1 percentage points to 5.9%. Economists expected the rate to fall to 5.6%. The report was not seen as strong enough to encourage the Fed to step away sooner from its easy policies. It was, however, seen as a positive — yet largely incomplete — picture of the labor market.

Daingerfield said there is the potential for the Fed’s June meeting minutes to surprise the market, similar to the way April minutes did.

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