World Week Ahead Investors bet on economy

Monday 17th February 2014

Minutes from the latest US Federal Reserve meeting and corporate earnings from companies including Coca-Cola and Wal-Mart will be scrutinised for clues to justify the newfound confidence about the US economic outlook.

In the past five days, the Dow Jones Industrial Average climbed 2.3 percent, as did the Standard & Poor's 500 Index, while the Nasdaq Composite Index advanced 2.9 percent. Meanwhile, US Treasuries fell, with yields on the 10-year bond climbing six basis points to 2.74 percent.

Fed Chairman Janet Yellen last week indicated in testimony to Congress that policy makers remain both optimistic and supportive about the recovery in the world's largest economy.

Investors will review the minutes of the January FOMC meeting, to be released on Wednesday, during which the Fed decided to taper its monthly bond-buying programme for the second month in a row by US$10 billion, downgrading it to the current US$65 billion.

"The bar for pausing the tapering process is really high," Jennifer Vail, head of fixed-income research at Minneapolis-based US Bank Wealth Management, told Bloomberg News. "We would have to see some material weakness in domestic growth for the Fed to take their foot off that gas pedal. They will continue on that path unless something substantial happens."

Also on Wednesday, St Louis Fed President James Bullard will talk on the economic outlook and monetary policy in Washington, while San Francisco Fed President John Williams will speak in New York. On Friday, Bullard will talk, again on the economic outlook and monetary policy, in St Louis.

Recent economic data have been negatively impacted by winter weather conditions in the US that have been more severe than usual. While so far US policymakers, including Yellen, have given the numbers the benefit of the doubt, an unpleasant surprise could lie ahead once the snow and ice melt and temperatures return to normal levels.

Yellen also warned that the recovery in the US jobs market is "far from complete", a comment interpreted by some Fed watchers as a sign that interest rates will remain low for some time, as her predecessor Ben Bernanke repeatedly said.

"The market is getting used to the bad weather, factoring it in," John Canally, investment strategist and economist for LPL Financial in Boston, told Reuters. "But the story is, it might get to April, when we get the March data, that we have a return to what the underlying strength of the economy looks like, and then that might be overstated."

On Monday, US markets will be closed for the Presidents' Day holiday.

The reports to be released in the coming days include the Empire State manufacturing survey and the housing market index, due Tuesday; housing starts and the producer price index, due Wednesday; consumer price index, weekly jobless claims, PMI manufacturing index, the Philadelphia Fed survey, and leading indicators, due Thursday; and existing home sales, due Friday.

On Friday, US marijuana stocks-including Tranzbyte, Growlife and Medical Marijuana-rallied after the Treasury Department said it would allow banks to accept accounts from those businesses, Bloomberg News reported. Shares of Tranzbyte, which sells pot in Colorado, soared 29 percent.

In Europe, the Stoxx 600 Index added 2.5 percent last week. The UK's FTSE 100 rose 1.4 percent, France's CAC 40 increased 2.7 percent while Germany's DAX jumped 3.9 percent.

Here the latest data scheduled for release include euro-zone and German ZEW sentiment indicators, due Tuesday; and German PPI, euro-zone PMI, and euro-zone consumer confidence, due Thursday.

The Bank of England will also release minutes from its latest meeting, on Wednesday.

The Bank of Japan will release its monetary policy statement on Tuesday.

BusinessDesk.co.nz

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