No QE3 but Bernanke gives some hope

Not only did Federal Reserve Chairman Bernanke not discuss the potential for more quantitatiive easing QE3 but he also did not discuss many other options for Fed policy at Jackson Hole last Friday. The onus has now shifted to the 2-day Fed FOMC meeting on September 21 where markets are looking (hoping) for fresh policy measures. Such hopes helped US equity markets bounce back after initially reacting negatively to Bernanke’s speech.

Bernanke provided some hope to markets that the US economy wasn’t sliding into the abyss while offering the potential for further Fed stimulus even if QE3 wasn’t quite on the cards. This hope was sufficient to spur markets higher. However, importantly Bernanke noted the limitations of monetary policy in stimulating growth over the medium term.

In this respect there will be plenty of attention on President Obama’s speech on September 5 in which markets will be looking for a response from the administration at a time when the economy is becoming an increasingly important issue for the electorate.

In the meantime there are plenty of data releases to contend with this week including the August US jobs report, ISM manufacturing survey, US consumer confidence and various confidence surveys in Europe. Unfortunately the news will not be positive as the data releases are set to reinforce concerns of economic slowdown. The US jobs report is likely to reveal a limited, around 75k increase in non-farm payrolls according to consensus while the ISM manufacturing survey is set to drop into contraction territory.

Consequently markets may start the week in risk on mood but this is unlikely to last given renewed economic worries. Moreover, Eurozone peripheral country travails continue to exasperate markets, with concerns that some members of German Chancellor Merkel’s coalition plan to vote against the revamped EFSF bailout fund and news that two German banks have yet to commit on Greece’s bailout plan. Against this background the EUR continues to defy gravity around the 1.45 level versus USD but may yet come down to earth with a bang.

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