Coming Week: Spotlight on Central Banks
Aaron Task
03/17/07 - 11:03 AM EDT
Updated from 9:53 a.m. EDT
Recent signs of stability in global markets face a new set of challenges in the coming week, most notably Bank of Japan and
Federal Reserve policy meetings.
In the wild-card department, Chinese Premier Wen Jiabao made some eye-opening comments Friday, characterizing his country's growth as "unstable, imbalanced, uncoordinated and unsustainable,"
Bloomberg reported.
The reaction to Wen's comments was notably muted Friday, which may suggest Asian markets' late-February rout was an isolated event. But similar to the time the premier's Chinese New Year holiday declaration about corruption and fraud spurred those massive losses in Shanghai, investors will have two days to mull Wen's latest comments, as detailed
here.
In addition to any postmull reaction to Wen's warnings and
the subsequent rate hike by the People's Bank of China Saturday, Monday is also the first day of a two-day BOJ policy meeting. Japan's central bank is largely expected to keep rates unchanged at 0.5%. But any comments about future rate hikes could revive fears of an unwinding of the yen carry trade -- or even actual unwinding of trades made by borrowing yen to finance investments in high-yielding securities around the world.
In addition to the BOJ's policy decision, Tuesday brings March housing starts data, the biggest U.S. economic event ahead of Wednesday's Fed meeting. No change in interest rates is expected, but traders will closely monitor the Federal Open Market Committee's accompanying statement, perhaps even more than normal given recent events.
The Fed's last policy meeting in late January came against the backdrop of a solid jobs report and strong advanced fourth-quarter GDP report. Since then, the four-week average of weekly jobless claims has hit its highest level since October 2005, fourth-quarter GDP has been revised down substantially and "the subprime mortgage issue has raced to the forefront of minds of the public, the media and the market," writes Joseph Brusuelas, chief U.S. economist at IDEAglobal. "What a difference six weeks makes."
By the end of the week, fears of a subprime mortgage meltdown were diminishing somewhat, thanks largely to comments from
Goldman Sachs(GS Quote),
Lehman Brothers(LEH Quote) and
Bear Stearns(BSC Quote). To varying degrees, each big broker said it was insulated from the low-end mortgage market and actually saw opportunities to profit from the upheaval.
Also having a calming influence was Friday's news from
Accredited Home Lenders (LEND Quote) that it has agreed to sell $2.7 billion of loans to an unnamed buyer and from
Fremont General(FMT Quote) that it got a credit line increase from Credit Suisse. Thursday brought news that
PHH(PHH Quote) is being acquired by
General Electric(GE Quote), which will sell PHH's mortgage operations to an affiliate of the Blackstone Group.
Still, the Fed is expected to acknowledge that it is at least monitoring the subprime situation in its statement. "We expect the committee to create a tone of consistency and one that clearly communicates its resolve to remain tough on inflation, but will between the lines signal to the market that it too is concerned with evolving events in the financial sector," writes Brusuelas. (For more on the economists' outlook for Fed policy and analysis of recent data, check out Thursday's
Real Story podcast.)
The Fed's task is complicated by last week's inflation reports, as well as Friday's stronger-than-expected industrial production/capacity utilization report. Friday's consumer price index was only slightly above expectations, but at 2.7%, the year-over-year change in the core rate remains above the Fed's so-called comfort zone.
In the wake of those reports, "the best we can hope for from the Fed is a change in the accompanying statement acknowledging the slow down and the possible impact that subprime lending may have on the overall economy," writes Robert Pavlik, chief investment officer at Oaktree Asset Management. "Wording to this effect will be taken as the FOMC is positioning itself for a potential rate cut later his year should inflation decline."
Such an outcome would presumably encourage the bulls, who have alternately argued that the subprime issue either is not a threat to the broader economy or is serious enough to prompt Fed rate cuts that will spur rising asset prices. (In technical terms, this is known as "heads bulls win, tails bears lose" theory.)
Still, the Fed finds itself in a box: It needs to reassure the financial markets it is closely monitoring the subprime situation and will act accordingly, if necessary. But at the same time, the Ben Bernanke-led Fed needs to restate its vigilance against stubbornly high inflation pressures or it will risk losing its hard-earned credibility. The latter scenario could send the dollar into rapid retreat and prompt an unwinding of the yen carry trades mentioned above.
In other words, Bernanke had better practice his tightrope walking this weekend.
Other News and Notables
Other economic events next week include the index of leading economic indicators Thursday and existing-home sales data on Friday. Scheduled corporate events include earnings from
FedEx(FDX Quote), which reports Wednesday, and
KB Home(KBH Quote) and
Nike(NKE Quote), both of which report Thursday.
Then there are the unscheduled events. What will become of what Jim Cramer calls the "rumored stocks," such as
Dow Chemical(DOW Quote) and
Alcoa(AA Quote)? Any merger or leveraged-buyout news for those or other big-caps would likely reinvigorate the animal spirits.
That said, given how this past week's losses pretty much wiped out the prior week's rebound, the animal spirit most evident on Wall Street these days seems to be of the ursine variety.
Caveat emptor.
