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Fed's turn to meet expectations after ECB shines

LONDON--Poor U.S. job figures for August make it more likely that the Federal Reserve will take out extra insurance this week against an economic relapse by plumping for fresh monetary stimulus.

With Chinese growth slowing markedly and the eurozone mired in recession, the United States is resuming its traditional role as a motor — though not a high-powered one — for the global economy.

Fed Chairman Ben Bernanke had already voiced “grave concern” about the labor market even before Friday's data showed the economy added just 96,000 nonfarm payroll jobs last month. The average gain over the past quarter is a mere 94,000 a month.

That is weak enough in the eyes of many economists to trigger a third round of asset purchases — or quantitative easing in market jargon — by the U.S. central bank, to bring down bond yields and perk up investors and companies.

A Reuters poll of 59 economists after the jobs report revealed a 60-percent chance of such action at the Fed's Sept. 12-13 policy meeting. A poll on Aug. 24 had put the likelihood at 45 percent

“It makes the forecast pretty easy that the Fed will move,” said Bruce Kasman, an economist with JPMorgan in New York. “We think the case has certainly been sealed.”

Kasman expects the Fed to buy another US$200 billion to US$300 billion of bonds and to extend its forecast that short-term interest rates will stay near zero from late 2014 into 2015.

Jan Hatzius with Goldman Sachs had not been expecting the Fed to ease further before the end of the year.

But he now sees a greater than 50-percent chance it will announce on Thursday that it will buy about US$50 billion of bonds a month, mainly mortgage-backed securities, with the end date of the program dependent on how the economy evolves.

The main U.S. data of the week will come on Friday. Retail sales probably rose 0.7 percent in August and industrial output just 0.1 percent, according to a Reuters survey of economists.

All Eyes on Top German Court

Europe has a light calendar of timely economic data — there is a batch of backward-looking eurozone figures for July — but a crowded schedule of political events, including Dutch elections on Wednesday and a meeting of European finance ministers on Friday.

Top of the list is a ruling by Germany's constitutional court on Wednesday on a motion to block the establishment of the European Stability Mechanism, the eurozone's new, permanent rescue vehicle.

Legal experts interviewed by Reuters all expect the court to approve the fund, but they also believe it will impose tough conditions limiting Berlin's flexibility on future bailouts.

The verdict could contain some “unpleasant surprises” for investors, said Holger Schmieding, an economist with Berenberg Bank in London.

That could have serious repercussions for the plan unveiled last week by European Central Bank President Mario Draghi for secondary-market bond purchases to lower what the bank sees as unjustifiably high yields on the debt of countries such as Spain and Italy.

Markets cheered Draghi for reducing the tail risk of the break-up of the single currency.

But the initiative hinges on struggling eurozone members applying for aid from the ESM or its current precursor fund, which would back up the ECB by buying those governments' bonds when they are auctioned.

Even if Germany's top court does not throw a spanner in the works, Draghi's gambit will not magically restore the European economy to health, said Andrew Milligan, head of global strategy at insurer Standard Life in Edinburgh.

“There is probably going to be some helpful impact for European industry in terms of lower yields and a boost to confidence, but from a growth point of view, this is not a game changer,” Milligan said.

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