Things got crazy last week with the global markets getting rocked as the emerging markets (EM) tumbled.

While everyone is sure to keep an eye on the EMs this week, the Federal Reserve will take center stage as it holds its Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday.

This'll be the last one with Ben Bernanke at the helm.

Here's your Monday Scouting Report:

Top Story

The Emerging Market Story: In a sentence, many would say that last week's emerging market sell-off was over fears of rising borrowing costs as the Federal Reserve embarks on a path to monetary policy normalization, which would mean higher interest rates, a stronger dollar, and consequently weaker emerging market currencies. The Bank of England, the Swiss National Bank, and the Bank of Japan were among other developed-market monetary authorities who had recently adopted a more hawkish tone.

However, the emerging markets consist of a vast group of diverse and dynamic economies with their various idiosyncrasies. So making broad generalizations is grossly imprecise and unfair. Addressing this somewhat, Capital Economics' Neil Shearing offered five groupings:

Argentina, Ukraine, Venezuela: "Serial mismanagement by the authorities is now posing a risk to economic stability." Turkey, South Africa, parts of South East Asia, Chile, Peru: These countries have "lived beyond their means and that now face a period of weaker growth. These countries are generally the ones that are most vulnerable to Fed tapering and the shift towards tighter global monetary conditions over the next couple of years." Emerging Europe including Hungary and Romania: These countries have "the legacy of previous booms continues to cloud the outlook. ...where a combination of the hangover from last decade’s credit bubble and strong financial ties to the euro-zone means that banking sectors are still fragile." Brazil, Russia, India, China (BRIC): These countries are "facing domestic structural problems... Their prospects will be shaped by the extent to which policymakers implement economic reform, rather than events in Europe or the actions of the Fed." Korea, the Philippines, Mexico: These are the countries "where the outlook is brightening."

It's Ben Bernanke's Final Fed Meeting: While Ben Bernanke hasn't officially announced his retirement as chairman of the Federal Reserve, he hasn't said anything to suggest otherwise as Janet Yellen has been confirmed to fill his seat. Given the Fed's effort to improve communications and enhance transparency, it's safe to assume that this week's Federal Open Market Committee (FOMC) meeting will be his last. Vice chair Janet Yellen will fill his vacated seat.

Unfortunately, this comes at a tricky time. The December jobs report was a huge disappointment with a measly 74,000 jobs added and the labor force participation rate tumbling to 62.8%, which was the main reason why the unemployment rate fell to 6.7% from 7.0%. Meanwhile, volatility has returned to the financial markets in a big way.

Still, most economists expect the Fed to be unfazed and to continue tapering quantitative easing. Here's Goldman Sachs' Kris Dawsey: "The January FOMC should be fairly uneventful, following significant policy changes made at the prior meeting. We anticipate a further $10bn reduction in the monthly rate of asset purchases to be announced?split equally between Treasuries and MBS?and no changes to the forward guidance. Although the 6.5% threshold mentioned in the statement is fast approaching, the Committee has probably already enhanced the forward guidance as much as it is willing to in the near term. A recent set of modestly negative data surprises, including most notably the December employment report, has likely not shifted the Fed’s thinking on the near-term outlook in a significant way. Although the market-implied path of the fed funds rate shifted up a bit, it remains very close to meeting participants’ own projections."

Economic Calendar

New Home Sales (Mon): Economists estimate the pace of sales in December fell 1.9% to an annualized rate of 455,000 units."A slower pace in mortgage applications and a downturn in the housing market index suggested a slightly slower pace in new home sales in December," said UBS's Sam Coffin. "Some of the change may be more related to supply of new homes than to demand: Newly completed homes for sale are not lingering on the market, and home prices continue to rise." Here's more from Wells Fargo's John Silvia: "[W]e are in the seasonally slow period of the year and the seasonal adjustment process can exaggerate overall activity due to lower volumes. The underlying details of the report and fundamentals are far more constructive. Builders remain fairly optimistic with sentiment still at an elevated level and buyer traffic improving. Moreover, many builders are focused on the move-up buyer where sales remain active."  Dallas Fed Manufacturing (Mon): Economists estimate this regional manufacturing index climbed to 3.3 in January from 3.1 a month ago. Here's UBS's Coffin on the manufacturing surveys: "The current activity indexes in the NY and Philadelphia Fed manufacturing surveys both rose in early January. Details of the surveys were less conclusive, with improvement in the NY Fed ISM-equivalent measure but an inventory-led decline in the Philadelphia Fed ISM- equivalent measure (see table below). Both have lagged the national ISM index, and that pattern probably continued in January." Durable Goods Orders (Tues): Economists estimate orders climbed 1.8% in December, with core capital expenditures climbing 0.3%. "In part, the forecasted increase reflects another pickup in civilian aircraft bookings, as reported by Boeing," said Wells Fargo's Silvia. "Other manufacturing indicators including the new orders component of the ISM manufacturing index and industrial production also support the projected gain. In fact, the ISM manufacturing new orders component reached its highest level in four years and industrial production posted its fifth successive monthly gain." S&P/Case-Shiller Index (Tues): Economists estimate that home prices climbed 0.8% month-over-month or 13.8% year-over-year in November. "Home price appreciation has remained strong despite the decline in affordability this summer, likely reflecting low inventory," said Bank of America Merrill Lynch economists. "We therefore see upside risk to our forecast for national home prices to end the year up 10%. That said, we continue to believe that price appreciation will slow into 2014 as investor demand declines and mortgage rates continue to head higher." Consumer Confidence (Tues): Economists estimate that the Conference Board's measure of sentiment slipped to 78.0 in January from 78.1 in December. "While most of the recent economic data have been positive, the December jobs report was a notable disappointment," said Bank of America Merrill Lynch. "Alongside losses in equities since the start of 2014, this should weigh on confidence." Richmond Fed Manufacturing (Tues): Economists estimate this regional manufacturing index was flat at 13 in January. Federal Open Market Committee (Wed): The Fed wraps up its  two-day FOMC meeting on Wednesday. Economists expect the committee will have tapered quantitative easing further by another $10 billion, bringing the monthly purchases down to $65 billion ($35 billion in Treasury purchases, $30 billion in MBS purchases). "In the waning months of Bernanke’s leadership, the FOMC’s focus on the unemployment rate as a primary driver of monetary policy has been giving way to heightened attention to inflation," said Credit Suisse's Neal Soss. "This shift in emphasis likely will continue with Yellen at the helm. As long as the outlook for inflation remains below the Fed’s 2% target, the FOMC is unlikely to consider hiking interest rates." GDP (Thurs): Economists estimate that GDP grew at a 3.2% pace in Q4 (down from 4.1% in Q3) led by a 3.7% gain in personal consumption. "Monthly trade data suggest we could see an outsized contribution from this component," said Wells Fargo's John Silvia. "The real trade deficit narrowed significantly in October and November and if the pace remains unchanged in December, trade is expected to make a significant contribution to the headline." Here's more from Citi's Peter D'Antonio: "The partial government shutdown likely caused a major pullback in spending at the federal level, subtracting about three-fourths of a point from overall growth. However, private domestic demand actually ramped up to about 4% in the quarter, mainly reflecting stronger than expected consumer spending." Initial Jobless Claims (Thurs): Economists estimate initial claims climbed to 330,000 from 326,000 a week ago. Pending Home Sales (Thurs): Economists estimate sales sales fell 0.1% month-over-month in December. "Colder-than-normal weather likely discouraged people from searching for new homes," said Bank of America Merrill Lynch economists. "And since pending home sales track signed contracts, this will show up directly in the data. This follows a string of weak data prints this summer and early fall in response to the sharp drop in affordability." Personal Income And Spending (Fri): Economists estimate income and spending each climbed by 0.2% in December. "Weakness in hours and earnings in the employment report pointed to lower wage and salary income, and slowing farm income support payments are also likely to be a drag again, so overall personal income should be little changed," said Morgan Stanley's Ted Wieseman. "Meanwhile, the surprisingly strong 0.7% gain in core ex auto retail sales and a modest expected gain in services should offset the pullback in unit auto sales to leave consumer spending a bit higher." Chicago Purchasing Managers Index (Fri): Economists estimate Chicago PMI slipped to 59.0 in January from 59.1 a month ago. "Production continued to be strong in December, but vehicle sales fell, indicating softening demand," said Bank of America Merrill Lynch. "Bad weather may have been a factor and, if so, this impact should continue to be felt in January." Univ. Of Michigan Confidence (Fri): Economists estimate this index of sentiment climbed to 81.0 in January from the preliminary reading of 80.4. "We were surprised at the softening in the University of Michigan sentiment index in early January and forecast some rebound in late January," said UBS's Sam Coffin. "Although no mention was made of Obamacare in the sentiment survey, we suspect that its rocky beginning affected confidence. Assessments of government policy fell again—not quite to their October level, but below November, December, and all the other months of 2013."

Market Commentary

Is This All Just A Big Short Squeeze?: For the most part, economists and market strategists entered 2014 optimistically. There was an "all-clear" feeling regarding risk as the U.S. economy appeared to be picking up steam. And all of this added to expectation that the Federal Reserve would continue to taper its large-scale asset purchases and eventually tighten monetary policy. This meant rising interest rates and falling bond prices.

Indeed, shorting Treasuries had arguably become one of the most overcrowded trades out there. So, what could've been an orderly sell-off was exacerbated by a big short squeeze in the bond market.

"Its mostly hedge funds and fast money accounts that have played it from the short side from the beginning of 2014," said Tom di Galoma, head of fixed income rates sales at ED&F Man Capital Markets. "Most were looking for higher rates in 2014 near 3.5-4% on 10-years. This rally is all about short positions being alleviated and covered."

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