It'll Be A Quiet Week For The Economy, But It'll Also Be The Start Of Something Huge - Here's Your Complete Preview

There isn't too much major economic data to follow.

But it'll arguably be the beginning of the Janet Yellen era of monetary policy.

Federal Reserve Vice Chair Yellen heads to Washington Thursday for her confirmation hearing before the Senate Banking Committee.

Here's your Monday Scouting Report:

Top Story

• The Confirmation Hearing: Everyone expects Yellen to be confirmed to be the next Chairman of the Federal Reserve. "Yellen will be tested on her dovish views on the economy and her leaning towards continued easy monetary policy," noted Wells Fargo's John Silvia.
  
  But because we haven't heard much from Yellen in recent months, anything she says has the potential to move markets. From Silvia: "For the markets, the focus will be on any signal that Yellen will lean toward an early tapering of Fed easing. What are her benchmarks for policy action? How about altering the unemployment rate target as reflected in the IMF papers cited this week in the press?"

Economic Calendar

• Monday: The bond markets will be closed and there are no major economic announcements scheduled.
  
• NFIB Small Business Optimism (Tuesday): Economists estimate that this index slipped to 93.5 in October from 93.9 in September. "Echoing reported increases in the Institute for Supply Management's manufacturing and non-manufacturing activity gauges, the National Federation of Independent Business small firm optimism barometer probably rebounded to a six-year high of 95.0 in October," said Societe Generale's Brian Jones.
• Monthly Treasury Budget (Wednesday): "We estimate the federal government ran a $95 billion budget deficit in the first month of fiscal year 2014, down from $120 billion in October 2012, with receipts expected to be up 9% year/year and outlays down 3%," said Morgan Stanley's Ted wieseman. "Upside in revenues reflects modest growth in withheld income and payroll taxes and good growth in nonwithheld payments as taxpayers who received extensions in April filed. On the spending side, defense spending appears to have posted a significant further decline, and the shutdown contributed to slower spending for the month in various other areas on top of ongoing sequester spending caps. We see the budget deficit in fiscal 2014 falling to $585 billion, or 3.4% of GDP, from $680 billion, or 4.1% in fiscal 2013."
• Initial Unemployment Claims (Thursday): Economists estimate that jobless claims ticked down to 330,000 from 336,000 a week ago. "Initial jobless claims likely rose during the second week of November, but our projection may be toward the high side of consensus," said Citi's Peter D'Antonio. "We found this week to be particularly difficult to forecast as our models may have overestimated the seasonal rise in the number of claims. The reason is due to the fact that the survey week marks the one-year anniversary of the spike in claims associated with Hurricane Sandy, and our models heavily weight recent years of activity."
• Trade Balance (Thursday): Economists estimate that the trade deficit widened to $39.0 billion in September from $38.8 billion in August. "The pace of import and export growth has slowed over the past year, but an ongoing shift in the pattern of petroleum has helped to narrow the trade deficit," said Wells Fargo's John Silvia. "We expect the trade balance to widen slightly in September. Exports should be boosted by economic activity beginning to pick up in some of the nation's major trading partners, and the dollar weakening slightly. Imports should also rise as domestic demand firms, making trade roughly neutral on GDP growth for the remainder of the year."
• Empire State Manufacturing (Friday): Economists estimate that this regional activity index jumped to 5.0 in November from 1.52 in October. "We look for a modest uptick in the November Empire State manufacturing index to 3.0 after an October print of 1.5," said Barclays' U.S. economics team. "This would be consistent with our expectations of an improvement in manufacturing activity in the coming months, but would leave the index below the levels seen in national measures of manufacturing activity, such as the ISM."
• Industrial Production (Friday): Economists estimate that production growth decelerated to 0.2% month-over-month in October from 0.6% in September. Capacity utilization is expected to be unchanged at 78.3%. "Manufacturing output should rise, but should be limited by a decline in auto output (according to industry data)," said Credit Suisse's U.S. economics team. "Elsewhere, we expect utilities to post another gain, following declines throughout the spring and summer. Mining could post a small decline following six consecutive increases."

Market Commentary

All-time highs and stretched valuations have some people freaked out that we may be doomed for a stock market crash.

Societe Generale's Alain Bokobza is concerned, but he isn't quite so dramatic:

"Further S&P 500 progression from current level is unlikely as U.S. government bond yields head higher in 2014. We expect U.S. government bond yields to approach 4% by Dec. 2014. At that level of yield, and with the normalisation of the risk premiums from rather cheap today (4.65%) to their long-term average (3.9%, which is an optimistic assumption), this would leave no room for U.S. equities to continue progressing after already five years of sustained equity index rise (+51% total return since the Lehman crisis).

"Potential for a near-term correction in U.S. equities can't be ruled out. The FED will eventually bring tapering back on the agenda in 2014. After all, does real GDP growth of 2.8% in the last quarter really deserve not only zero rates but also active monetary injection? Our analysis suggests that a U.S. government bond yield between 3% and 3.5% could trigger a correction of between -12% and -22% on the current ERP."