World Week Ahead Yellen sets the tone

Monday 17th March 2014

While the endgame in Crimea is unclear, the US central bank is all but certain to pare its pace of monthly bond purchases by another US$10 billion after its top policymakers meet for two days this week.

The Federal Reserve, now chaired by Janet Yellen, has every reason to continue to ease off the stimulus pedal as the US economy gathers momentum.

Last week jobless benefit claims fell to their lowest since late November and data showed that retail sales rose for the first time in three months in February.

"Our anticipation is the Fed will taper again maintaining the schedule they have," Sam Wardwell, investment strategist at Pioneer Investments in Boston, told Reuters. "There seems to be a high hurdle for them to alter that schedule."

A slew of fresh data will be released in the coming days starting with February's industrial production on Monday, consumer prices, housing starts and building permits on Tuesday with the March Philly Fed survey, February existing home sales and February leading indicators on Thursday.

But it will be the release on Wednesday in Washington of the Federal Open Market Committee's decision, and Yellen's first post-meeting news conference as chair, that will be the centre of attention.

The meeting is a chance for Yellen to tweak the Fed's guidance on future policy without triggering market volatility.

"Less forward guidance could mean more uncertainty" about the path of the Fed's benchmark rate, Michael Gapen, a senior US economist at Barclays, told Bloomberg News. "If it is volatility because we don't understand their reaction-function, then that is not good."

Volatility of course isn't simply a reflection of what the Fed is or isn't doing. Geopolitical risks are heightened at the moment with Russia showing no signs of backing down in Ukraine. While the outcome of Sunday's referendum in Crimea is generally assumed to be in favour of Russia, annexation of the region is fraught with unknowns.

"It will be harder to make a new high with these global and geopolitical effects overhanging," Andre Bakhos, managing director at Janlyn Capital, told Reuters.

Russia's President Vladimir Putin and Germany's Chancellor Angela Merkel spoke via telephone on Sunday. "President Putin pointed out that the Crimean people express their will in full accordance with international law, in particular, article 1 of the United Nations Charter that sets forth the principle of equal rights and self-determination of peoples," according to a statement issued by the Kremlin on Sunday. "It has been stressed that Russia will respect the Crimean people's choice."

Last week, the Dow Jones Industrial Average fell 2.35 percent, the Standard & Poor's 500 index shed 1.97 percent and the Nasdaq Composite index lost 2.1 percent. All three benchmarks closed down on Friday.

Investors also were on the defensive in Europe last week: the Stoxx 600 dropped 3.3 percent. On Friday shares across Europe closed mostly lower.

The latest economic reports will arrive in the form of euro-zone CPI today, euro-zone ZEW sentiment on Tuesday, German PPI on Thursday, and euro-zone consumer confidence on Friday.

On the currency market, China's central bank is moving ahead with plans to bolster international acceptance of the yuan. On Saturday, the bank said it would expand the currency's trading band effective today.

The move comes amid rising concern about the strength of the world's largest economy and in the wake of China's first corporate bond default.

BusinessDesk.co.nz

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