World Week Ahead: Will Draghi deliver dosh?

Monday 7th March 2016

With stronger-than-expected jobs data chasing away any lingering concerns the US might be headed for a recession, equities are poised to regain their footing in a week the European Central Bank is expected to add even more monetary stimulus.

Eyes will firmly rest on the ECB when it concludes its meeting on Thursday, as President Mario Draghi flagged earlier this year that policy makers may increase measures to help stoke the region’s sagging economy as early as this month.

“Investors are now becoming cautious ahead of the ECB,” Luca Cazzulani, a senior fixed-income strategist at UniCredit in Milan, told Bloomberg. “The short end stays supported as it’s consensus that the ECB will cut rates. The 10-year is more volatile as investors are questioning if more QE will be enough to keep it at the current very low levels.”

Expected measures include a deposit-rate cut by at least 10 basis points, an increase of 10 billion to 20 billion euros in monthly asset purchases and an extension of the programme, according to Bloomberg surveys of economists. The ECB might also downgrade its estimates for the region’s inflation and economic growth.

Friday’s 0.7 percent gain in the Europe Stoxx 600, helped lift the index to a third straight weekly advance last week. Mining stocks rallied in line with base metals.

Meanwhile, the US economy appears to defy any recession concerns. A Labor Department on Friday showed that US non-farm payrolls grew a larger-than-expected 242,000 in February, after an upwardly revised gain of 172,000 in January. The unemployment rate held at 4.9 percent, as more people began looking for work. To be sure, average hourly earnings declined.

The jobs data were the latest in a string of better-than-expected data, which not only stemmed concern about the US economy but also brought forward expectations for Federal Reserve interest rate increases. Still, few expect US policy makers to move when they hold their next two-day meeting beginning on March 15.

First, investors will eye comments from Fed Vice Chair Stanley Fischer and Fed Governor Lael Brainard who are both set to speak in Washington today.

"The lack of a more marked pickup in wage growth is the only missing element," Paul Ashworth, chief US economist at Capital Economics in Toronto, told Reuters. "But as far as the Fed is concerned, it is already seeing a clear acceleration in core price inflation. A June rate hike is coming."

Wall Street revelled in further evidence of solid growth. Last week, the Dow Jones Industrial Average advanced 2.2 percent, while the Standard & Poor’s 500 Index climbed 2.7 percent, and the Nasdaq Composite Index rose 2.8 percent.

“Expectations went too far on a recession expectation,” Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, told Reuters. “That's why the market has rallied in the past two weeks. It's pricing out a chance of a recession.”

US data on tap this week include the labour market conditions index and consumer credit, due today; NFIB small business optimism index, due Tuesday; wholesale trade, due Wednesday; weekly jobless claims and the quarterly services survey, due Thursday; and import and export prices, due Friday.

On Saturday China said it is aiming for average economic growth at or above 6.5 percent for the next five years. It would target economic growth between 6.5 percent and 7 percent in 2016, the government said.

“A modestly lower growth target shows the authorities will ease enough to prevent a near-term hard landing and that they understand the peril of an excessive buildup in debt,” Yao Wei, a Paris-based China economist at Societe Generale, told Bloomberg before the report. “There will be further policy easing, especially fiscal, but at best this may be enough to only temporarily prevent a sharper deceleration in growth.”

Bank of Japan Governor Haruhiko Kuroda, who last Friday said the bank isn’t considering cutting rates further at this point, is set to speak in Tokyo today.

Japan’s central bank in January unexpectedly adopted a negative interest rate policy in an effort to revive the nation’s moribund economy.

BusinessDesk.co.nz

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