World Week Ahead Eyes on ECB's Draghi, US jobs

Monday 3rd September 2012

New week, different continent, but a similar focus as investors eye clues as to whether, and how, euro-zone policy makers will make good on a pledge to do whatever is needed to salvage the single currency.

Expectations are high. Investors have been betting heavily on support from central banks in the US, Europe and China. US Federal Reserve Chairman Ben Bernanke on Friday underpinned that American policy makers are ready to act to accelerate the pace of economic expansion, yet again stopped short of announcing specific measures.

A key focus this week is on European Central Bank President Mario Draghi and the comments he'll make following the central bank's policy meeting on Thursday. Investors are expecting further details on his plans to buy debt of struggling euro-zone nations, in particular Spain and Italy, to lower their borrowing costs, an idea that has so far found little support from Germany. Late last week reports surfaced that Bundesbank chief Jens Weidmann had threatened to quit over the ECB's bond-buying plans.

There are "growing hopes that Draghi has overcome Bundesbank opposition to announce a bond buying plan," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co, told Reuters. What Draghi may have put in front of Weidmann "is the notion that no actual purchases may ever occur as long as the market understands what it is up against in terms of coordinated, decisive policy response from the ECB."

Some believe that Draghi's promise at the end of July that the ECB would do whatever it took, within its mandate, to safeguard the euro was what helped the S&P 500 defy expectations for a pullback in August. The index posted a gain of 2.3 percent last month, compared with a 5.7 percent slide in August 2011, according to Bloomberg News.

"If it hadn't been for Draghi's 'We will do everything' remark, the S&P 500 would've followed the 2011 script," Manish Singh, the London-based head of investment at Crossbridge Capital, told Bloomberg. "The ECB has played the main role in making this year different."

Bernanke's comments at the Fed's annual Jackson Hole, Wyoming conference were enough to help lift Wall Street on Friday, though insufficient to erase the declines earlier in the week. In the past five days, the Dow Jones Industrial Average shed 0.5 percent, the Standard & Poor's 500 Index fell 0.3 percent and the Nasdaq Composite Index slipped 0.1 percent. Europe's Stoxx 600 Index suffered a 0.7 percent decline last week.

"The basic problem for investors at this point in time is that everyone knows the Fed considers the current economic performance to be unacceptable, but is it unacceptable enough for them to act today or tomorrow before the election?" Cary Leahy, senior managing director at Decision Economics in New York, told Reuters.

A Labor Department report, due Friday, may prove the catalyst for the Fed's next move. The report is expected to show that the US added fewer jobs in August than the previous month. Both Reuters and Bloomberg surveys forecast nonfarm payrolls rose by 125,000 for the month of August, after adding 163,000 in the month of July.

The labour market's continuing weakness may be enough to prompt the Fed to announce a third round of US government asset purchases. Federal Reserve Bank of San Francisco President John Williams told Bloomberg TV on Friday that the Fed should have open-ended buying program totalling at least $US600 billion.

"Payroll growth is pretty lacklustre," Joshua Shapiro, chief US economist at Maria Fiorini Ramirez in New York, told Bloomberg. "It's going to be hard to bring down the unemployment rate quickly. Demand is soggy and on top of that we have weakening exports and fiscal policy uncertainty."

Other reports in the coming days include the Institute for Supply Management manufacturing survey on Tuesday, non-farm productivity and labour costs on Wednesday, and the ADP private-sector employment report and weekly jobless claims on Thursday.

US markets are closed on Monday for the Labor Day holiday.

BusinessDesk.co.nz

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