World Week Ahead: Can the party continue?

Monday 25th August 2014

Equities might hold on to the momentum regained last week from a slew of better-than-expected economic data, while US Federal Reserve Chair Janet Yellen pointed to the remaining slack in the US jobs market, suggesting she is not ready to raise interest rates yet.

The US jobs market has improved. Job gains in 2014 have averaged 230,000 a month, up from the 190,000 a month pace during the preceding two years; the unemployment rate, at 6.2 percent in July, has declined nearly 4 percentage points from its late 2009 peak, Yellen said on Friday at the Fed’s annual Jackson Hole, Wyoming meeting of global central bankers.

“The economy has made considerable progress in recovering from the largest and most sustained loss of employment in the United States since the Great Depression,” Yellen said.

However, she also stressed concern about a lack of growth in wages.

“The labour market has yet to fully recover,” Yellen said.

“Indeed, in real terms, wages have been about flat, growing less than labour productivity,” Yellen said. “And, since wage movements have historically been sensitive to tightness in the labour market, the recent behaviour of both nominal and real wages point to weaker labour market conditions than would be indicated by the current unemployment rate.”

Wall Street ended Friday marginally lower, with the Standard & Poor’s 500 index closing 0.2 percent down from the record-high close of 1,992.37 on Thursday. However, for the week the Dow Jones Industrial Average climbed 2 percent, while both the S&P 500 and the Nasdaq Composite Index gained 1.7 percent.

"Janet Yellen confirmed the majority view of the (Fed's policy committee): much more labour recovery is needed before the Fed raises policy rates," David Kotok, chairman of Cumberland Advisors in Sarasota, Florida, told Reuters.

Last week’s gains brought the advance in 2014 so far to 4.2 percent for the Dow, 9 percent for the S&P 500, and 9.6 percent for the Nasdaq.

“As long as the economy continues to perform well, the market is in good shape,” Jim McDonald, chief investment strategist at Chicago-based Northern Trust, told Bloomberg News. “The Fed is also doing a good job at preparing the market for the eventual increase in interest rates.”

Indeed, bonds fell last week, pushing yields on five-year notes 12 basis points higher to 1.66 percent.

After last week's better-than-expected reports on the housing market, investors hope for more good news in the coming days. Data scheduled for release including new home sales, due today, the FHFA house price index and S&P Case-Shiller home price index, due Tuesday, and the pending home sales index, due Thursday.

There is a flurry of other economic reports scheduled for release, including the Chicago Fed national activity index, PMI services flash, and Dallas Fed manufacturing survey, due today; durable goods orders, consumer confidence, and Richmond Fed manufacturing index, due Tuesday; gross domestic product, weekly jobless claims, and Kansas City Fed manufacturing index, due Thursday, and Chicago PMI and consumer sentiment, due Friday.

In Europe, the Stoxx 600 jumped 2.1 percent last week, while the UK’s FTSE 100 Index rose 1.3 percent.

Here, eyes will be on the Ifo Institute’s monthly survey of economic sentiment among business leaders in Germany, due today, and especially the latest reports on euro-zone inflation as well as unemployment, due Friday.

As the Fed is looking at the timing to tighten monetary policy, the European Central Bank is considering ways to further accommodate the struggling euro-zone economy. In Jackson Hole, ECB President Mario Draghi signalled increased concern about the euro-zone’s inflation and unemployment.

“Central banks are no longer on the same side anymore,” Mohamed El-Erian, former chief executive officer of Pacific Investment Management, told Bloomberg. “Chair Yellen’s main challenge was how quickly should she lift her foot off the accelerator,” while Draghi “has the opposite problem -- how much should he step on the accelerator and when.”

BusinessDesk.co.nz

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