New York, Aug 5 (Newswire): Stocks are riding high on the prospect that central bankers will take action in the week ahead to kick start the economy and stem the euro zone's debt crisis.
Both the Federal Reserve and the European Central Bank meet, and while they may take some action, neither is expected to deliver the whole menu of items looked for by markets. At the end of the week, the July employment report looms large and is expected to show that just 100,000 jobs were added this month in a slow growing U.S. economy.
There are also earnings from about a fifth of the S&P 500 and General Motors, AIG, Procter and Gamble, Kraft, Time Warner, Berkshire Hathaway and MasterCard are among the companies reporting. Auto makers also report monthly sales, and chain stores report their July sales.
Most Fed watchers do not expect the Fed to announce a new quantitative easing, or asset purchase program, but it could take smaller steps and lay the groundwork for more easing later in the year. The ECB, reported to be considering a range of actions, may take some steps at its meeting toward resolving its problems, but not all the steps immediately looked for by markets. There were news reports that ECB President Mario Draghi was discussing a rate cut, a new liquidity program, and a plan to give a banking license to its bailout fund.
"There's a risk that the market may expect the ECB to be acting instantaneously next week when in fact it does take time for some of these things to be put in place," said Robert Sinche, head of global foreign exchange strategy at RBS.
European policy makers would need to be involved with some of the changes, such as giving bank status to the European Stability Mechanism so that it could directly aid banks.
"I think that again the markets need to be encouraged by the fact that they're attempting to address new ground. And the ground has the potential to be very influential going forward. But we also need to be realistic about how long these things take," Sinche said.
Stocks ended the week with strong gains, after starting the week gripped by worries that the Spanish sovereign would need a bailout, and by association Italy might as well. Risk assets sold off, and investors ran to the safety of bunds and Treasurys, sending yields to record lows across the curve. At the same time yields on Spanish debt shot higher, with the five year surpassing the 10-year, a sign of stress.
But Draghi turned the tide with a comments that the ECB stood ready to do whatever it takes to support the euro, and that the ECB's action would be enough. German Chancellor Angela Merkel and French President Francois Hollande, in a joint, communique, said they too were prepared to support the euro.
Reports that Draghi was speaking to ECB council members about taking action helped spur an even bigger rally. There were also reports that Treasury Secretary Timothy Geithner is expected to meet with Draghi, giving traders more confidence that some actions are being planned.
The Dow finished the week nearly 2 percent higher, at 13,075, above 13,000 for the first time since May. The S&P 500 gained 1.7 percent to 1385, its highest level since May 3. The Nasdaq rose 1.1 percent to 2958.
The rally came at the end of the week that saw some major earnings disappointments, including from Wall Street favorite Apple, as well as Facebook, Exxon Mobil, DuPont and dozens of others. Of the almost 60 percent of the S&P companies reporting so far, 60 percent have missed revenue estimates, though 67 percent beat on earnings. Economic reports also were disappointing, with weaker durable goods and housing data . But the report of second-quarter GDP was as expected, though it still showed sluggish growth of just 1.5 percent.
"We've (stocks) spent the last couple of days celebrating something that might not come to pass next week. And on the back of that, we'll probably trade sideways because we have two back-to-back announcements from two central banks, and they're equally important," said Art Hogan of Lazard Capital Partners.
Investors seemed to have looked past the market's immediate worries of sluggish U.S. growth and weakening earnings. They instead focused at the end of the week on the possibility of new efforts to contain the European sovereign crisis, at the root of the global slowdown. "Very much like our central bank, there may be some action taken but it's not going to be shock and awe," said Hogan.
Bond yields rose, with the 10-year yield at 1.54 percent late in the day. It touched a low of 1.37 percent earlier in the week. "I think this is an in-range corrective sell off," said CRT Capital senior Treasury strategist Ian Lyngen. "I don't think this is a tone change." Lyngen said he does not expect the Fed to announce QE3, but he said the markets will be very disappointed if there's no action from European central bankers.
While there is a chance, Fed watchers say it's not likely the Fed will announce a QE3 bond purchase program when its meeting ends. It is more likely the Fed uses communications, or even cuts the rate on reserves to stimulate activity.
Some economists expect the Fed might extend the time frame on its extreme low rate policy to mid-2015 from the end of 2014.
"I don't think it's inconceivable they do another round of QE, but I still think it's more likely they do it in September rather than they do it next week. I think it's going to be very dependent on how the next few jobs reports look," said J.P. Morgan economist Michael Feroli.
Barclays chief U.S. economist Dean Maki does not expect the Fed to take action at all. He said it will likely continue with Operation Twist, and if growth improves to the 2 percent growth rate he expects in the third quarter, it may not take any further action beyond twist.
In Operation Twist, the Fed has been buying Treasurys at the long-end of the curve, and selling the same amount of shorter duration Treasurys, but it does not expand the Fed balance sheet as QE does.
"We're looking for a bit of improvement to 100,000 jobs growth, up from 80,000 last month," said Maki. "We do think if we see that type of improvement in the next couple of reports, that would be enough to keep the Fed on hold. What would not be alright with the Fed is further deterioration over the next few months."
Maki expects the unemployment rate to stay at 8.2 percent in July. "Our view is the rate of job growth needed to keep the unemployment rate stable is 75,000 to 100,000 range, and we've been at that," he said.
