World Week Ahead: Fed back in focus, BOJ too

Monday 15th March 2010

The Federal Reserve rarely falls far out of focus but each time its policy committee meets - as this week - investors tend to be more alert for any insight that may emerge.

Fed Chairman Ben Bernanke and his regional counterparts have been so consistent and talkative that the statement issued after their regular meeting has been more anti-climatic than in past years. The same should be expected this week.

Investors will be watching for any hint of a change in language about the potential timing of an increase in interest rates. At best, Fed watchers may see low rates “for an extended period” reworked to something such as, low rates “for now”.

There are signs that while the US economy is solidly in recovery mode, the pace of growth remains mixed. And there are now alarms bells ringing in China with authorities there apparently set to further rein in lending to choke inflation, even if it results in the economy easing.

Checking inflation generally would win support from investors but given China’s prominent role in how the global economy has been brought back to life this past year, any sign of a deceleration could knock commodities prices and then profits at commodities’ producers, and manufacturers in Europe and the US would have to rethink the way forward.

All of this ‘background noise’ has for the most part, for now, been dismissed by equities’ investors.

Futures on the S&P 500 expiring this month climbed 0.7 point to 1151.3 on Friday, Bloomberg News reported, amid growing speculation the economic recovery in the world’s biggest economy would be sustained. That’s the longest streak since they were created in 1982.

“The glass may be half full, but people are not quite certain they can hold on to the glass,” Jason Pride, director of investment strategy at Glenmede in Philadelphia, told Bloomberg.

Joseph Benanti, managing director of sales and trade at Rosenblatt Securities in New York told Reuters: “I'd like to see some consolidation at these levels to where people start to feel comfortable that the numbers are right, the earnings are in line with expectations and we can continue to build over the rest of the year.”

Benanti said a push above 1150 could lift the S&P 500 to 1175 or 1200.

For the week, the Dow Jones industrial average rose 0.6%, while the S&P 500 was up 1% and the Nasdaq Composite Index added 1.8%.

On Friday, European stocks advanced with the Dow Jones Stoxx 600 ending at a seven-week high. For the week, the Stoxx was up 0.5%.

Whether European stocks extend their gains may well depend on whether European Union members offer Greece financial help. On Friday the Kurier newspaper reported Greece may get 55 billion euros from the EU to ease its debt crisis.

There’s little else to drive stocks as earnings seasons in various parts of the world have passed for the moment.

In addition to the Fed’s committee meeting, the Obama administration let it be known on Friday that it’s looking to nominate Janet Yellen to the number two post, vice chairman, of the Fed, and fill two other vacant Fed board seats.

Yellen, president of the San Francisco Federal Bank, is seen as a policy dove, a consummate team player and recently talked about the hypothetical case for negative interest rates.

It isn’t just US central bankers who will be watched next week as the Bank of Japan may move to rein in the yen or at least move to limit further appreciation.

As for China’s yuan. Nobel Prize-winning economist Paul Krugman said global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running trade surpluses.

Krugman said China’s currency policy has a “depressing effect” on economic growth in the US, Europe and Japan, as measured by gross domestic product. If China’s currency, the yuan, were not undervalued, it would have a “significant” impact on the global recovery, he said, according to a Bloomberg report on a speech on Friday at an Economic Policy Institute event in Washington.

On the economic front, the US calendar is busy this week. Two regional manufacturing surveys are due - Empire State and Philly Fed reports, housing starts and later in the week both producer and consumer price reports.

The consumer price index for February is forecast to gain 0.1%, compared with an increase of 0.2% in January. Core CPI, which omits volatile food and energy prices, is forecast to rise 1.4% in February, following a 1.6% gain in January.

Businesswire.co.nz

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