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World week ahead: all eyes on ECB, Fed

Hopes for fresh monetary stimulus might be answered this week in Europe, which also begins with a resolution to Italy's two-month political stalemate.

Wed, 11 Jul 2018

Hopes for fresh monetary stimulus might be answered this week in Europe, which also begins with a resolution to Italy's two-month political stalemate.

In the US, investors will focus on a two-day meeting of Federal Reserve policymakers beginning on Tuesday, before their counterparts at the European Central Bank gather on Thursday.

Europe's Stoxx 600 Index climbed 3.7 percent in the past five days, it biggest weekly gain in 2013, as the latest economic data, including record unemployment for Spain and France and a larger-than-expected drop in German business confidence bolstered expectations that the ECB will cut borrowing costs this week.

Forty-three of 69 economists in a Bloomberg News survey forecast that the central bank will lower its benchmark rate to 0.5 percent from 0.75 percent on Thursday.

"The real effect needs to be to get banks to lend, to encourage government to work on stimulus measures and stop being so completely focused on austerity," Lorne Baring, managing director of wealth manager B Capital in Geneva, told Reuters.

The increasing likelihood of a rate cut sent the euro 0.2 percent lower against the greenback in the past five days, with the single currency sliding for a second week in a row.

Investors should feel relief as a political drag of uncertainty on a troubled member of the eurozone was removed over the weekend. Italy's two-month political deadlock ended on Saturday when Enrico Letta named a coalition government to be confirmed by parliament within days.

Mediation ability

"Letta's choice of ministers shows his ability as mediator," Carlo Alberto Carnevale-Maffe, professor of business strategy at Milan's Bocconi University, told Bloomberg News. "The ministers are all moderate and no extremists are included."

As for Europe's corporate earnings, they have been a mixed bag. Thomson Reuters StarMine data showed 51 percent of the STOXX Europe 600 companies that have announced results so far have fallen short of analysts' expectations.

Friday's report on the American economy also fell short of expectations, underpinning bets that the Fed will continue to buy securities at a rate of $US85 billion a month.

"Don't expect to see any tapering of asset purchases or a slowdown in the growth of the Fed's balance sheet anytime soon," Diane Swonk, chief economist at Mesirow Financial in Chicago told Reuters.

US gross domestic product grew in the first three months of this year at a 2.5 percent annualised rate, the government reported on Friday. While that was up from a meagre 0.4 percent pace in the last quarter of 2012, economists had forecast growth of 3 percent to 3.1 percent.

A separate report on Friday showed that confidence among American consumers, as measured by Thomson Reuters/University of Michigan final index of consumer sentiment, dropped to a three-month low in April but was better than expected.

Clearer outlook

There is an opportunity for the outlook to become clearer this week. There are several reports on the housing industry, including the pending home sales index due on Monday, the S&P Case-Schiller home price index due Tuesday, and construction spending on Wednesday.

A key focus will be Friday's monthly payrolls, following Tuesday's employment cost index and Wednesday's ADP employment report and Thursday's jobless claims.

Economists polled by Reuters are looking for job growth of 150,000 in April, up from a shockingly low 88,000 in March. The unemployment rate is likely to remain steady at 7.6 percent.

Then there is consumer confidence and Chicago PMI, both on Tuesday, the PMI manufacturing index on Wednesday, international trade on Thursday as well as the ISM non-manufacturing index and factory orders on Friday.

As for the latest US earnings, most companies so far have managed to surpass low expectations. Of the 270 S&P 500 companies that have released results so far this reporting season, 74 percent have exceeded analysts' predictions, according to Bloomberg data.

In the coming days earnings reports are due from Pfizer, Merck, Facebook, Loews, Chesapeake Energy, Visa, Time Warner and Kraft Foods.

In the past five days, the Dow Jones Industrial Average advanced 1.1 percent, the Standard & Poor's 500 Index rose 1.7 percent, while the Nasdaq Composite Index added 2.3 percent.


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World week ahead: all eyes on ECB, Fed