World Week Ahead It's all about the Fed

Monday 16th December 2013

All eyes are firmly fixed on US Federal Reserve policymakers as they gather for their final meeting of 2013 during which some believe they will decide to start scaling back their US$85 billion a month bond-buying program.

As the US unemployment rate dropped to a five-year low of 7 percent in November, and third-quarter GDP accelerated more than expected to a 3.6 percent annual rate, an increasing number of economists forecast the Fed might announce a taper this week.

Even so, the majority expects they will hold off until 2014. That's what former Fed Vice Chair Donald Kohn said he would recommend. "I think I would wait," Kohn said Friday during a question-and-answer session with The Wall Street Journal's David Wessel at a George Washington University conference on the Fed.

The Federal Open Market Committee will release a statement at the end of its two-day meeting ending on Wednesday, while Fed Chairman Ben Bernanke will hold a press conference.

"There's a set of people that think [the Fed] is going to announce a tapering, but I think what we will have is more clarity," Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York, told Reuters.

Clarity would be welcome.

"The debate about the beginning of the Fed tapering at its December 17-18 meeting hangs over markets like the sword of Damocles," Martin Schlatter, a fund manager at Swiss Rock Asset Management in Zurich, told Bloomberg News.

Last week the Dow Jones Industrial Average dropped 1.65 percent, as did the Standard & Poor's 500 Index, while the Nasdaq Composite Index shed 1.51 percent.

"Once we get the Fed news out of the way [this] week, I expect the seasonal factor to kick in and we may see historical highs again leading up to the new year," Ryan Detrick, analyst at Schaeffer's Investment Research in Cincinnati, Ohio, told Reuters.

A slew of economic reports are scheduled for release as well in the coming days.

They include the Empire State manufacturing survey, productivity and costs, PMI manufacturing estimate, and industrial production, due Monday; consumer price index, current account, and housing market index, due Tuesday; housing starts, due Wednesday; weekly jobless claims, Philadelphia Fed survey, existing home sales, and leading indicators, due Thursday; and GDP, Atlanta Fed business inflation expectations, and Kansas City Fed manufacturing index, due Friday.

The Treasury will auction US$32 billion in two-year notes on Tuesday, US$35 billion in five-year securities on Wednesday and US$29 billion of seven-year debt on Thursday.

In Europe, the Stoxx 600 Index dropped 2.1 percent last week. The UK's FTSE 100 shed 1.5 percent, Germany's DAX fell 2.5 percent, and France's CAC 40 gave up 3.9 percent.

The latest clues on the euro-zone economy will arrive in the form of PMI data for the region as well as the trade balance, due Monday, ZEW economic sentiment and CPI, due Tuesday, Germany's IFO, due Wednesday, euro-zone current account, due Thursday, and German Gfk consumer sentiment, due Friday.

But it's Bernanke and his colleagues who will determine whether the year-long rally will extend itself in a last-minute, holiday-season inspired buying frenzy.

BusinessDesk.co.nz

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