World Week Ahead: Cue the Fed

Monday 10th September 2012

The key question in the coming days is whether Federal Reserve policy makers will follow the example of their European counterparts by making good on a promise to help accelerate an increasingly languid US economy.

The latest American jobs numbers cast a shadow on the outlook for the labour market even though investors saw them as another reason for the Fed to initiate a third round of quantitative easing, perhaps as early as this week.

Friday's Labor Department data showed employers added 96,000 jobs in August, down from a 141,000 gain in July, and well short of expectations. The jobless rate edged down to 8.1 percent as an increasing number of people simply gave up looking for a job.

"Good news is good news and bad news is good news, largely because of the Bernanke put," Eric Kuby, chief investment officer, North Star Investment Management in Chicago, told Reuters.

Indeed, the median of forecasts from 59 economists polled by Reuters gave a 60 percent chance Fed Chairman Ben Bernanke will announce QE3 on Thursday at the conclusion of the two-day FOMC meeting.

The Fed has already spent US$2.3 trillion buying assets - mortgages and government securities - in an effort to make it easier for businesses and individuals to borrow money. The impact has been muted.

There's now an expectation that the Fed, like the ECB agreed last week, will opt for an open-ended approach to buying more assets, giving it greater flexibility to respond to economic data as it is released.

"QE is coming," Sean Murphy, a trader in New York at the primary dealer Societe Generale, told Bloomberg. "They'll be buying mortgages or announcing some kind of mortgage-buying program. What we're seeing is buyers of fives and sevens because the life of a mortgage averages out to that area."

The Fed's policy committee also is expected to consider extending its commitment to keep interest rates at current levels into 2015 - it already has promised to keep rates low through late 2014.

US economic reports this week include international trade numbers, the consumer price index and retail sales.

In the past five days, the Dow Jones Industrial Average rose 1.6 percent, the Standard & Poor's 500 Index gained 2.2 percent and the Nasdaq Composite Index added 2.3 percent. It was the best week for the S&P and Nasdaq since June, and the best for the Dow since July, Reuters reported.

Europe's Stoxx 600 Index added 2.3 percent last week. National benchmark equity indexes advanced in all of the 18 western European markets last week, according to Bloomberg.

As for Europe, another key week approaches. Germany's constitutional court will rule on the nation's participation in the proposed EU rescue fund on Wednesday, the same day that Dutch voters cast national ballots.

In Athens, Greek political leaders are under increasing pressure to finalise fresh spending cuts after a weekend meeting with its international lenders, while French President Francois Hollande may lower his forecast for economic growth as early as today ahead of the presentation of a budget later this month.

And if that isn't enough for investors to watch, China's economic outlook is becoming increasingly worrisome. President Hu Jintao this weekend said "notable downward pressure" is a concern and the government has "an arduous task" of creating jobs for new entrants to the labour force.

BusinessDesk.co.nz

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