EmailThe S&P futures are currently pointing to a flattish start for the equity market following the three-day weekend. Even so, there is a feeling of uneasiness that persists about the fundamental outlook.
Economic growth is slowing and earnings growth is slowing. What is growing, though, is the market's hope for central bank stimulus.
Fed Chairman Bernanke did not say anything new last Friday, yet the reminder that the Fed stands ready to act if necessary was apparently enough of a carrot to keep the equity market from losing its head. This week it is the ECB's turn to appease the market.
Reports this morning suggest the ECB could announce a plan on Thursday where it purchases sovereign bonds with maturities up to three years. Notably, Spain and Italy are among the few European equity markets trading higher today, notwithstanding added reports that there have been huge outflows from Spain's banks, that Moody's lowered its outlook on the EU's AAA rating to negative from stable, and that several countries saw downward revisions to preliminary PMI readings.
The important catch with the ECB's bond-buying program, should there be one, would be the condition that "needy" countries must first seek aid from Europe's bailout funds. It is here where pride could stand in the way of prudence given the reforms that would have to be enacted as a condition for receiving such aid.
Until then, the market appears to be comforted by the idea that there is at least a safety net of some sort being raised to keep its trapeze act from suffering a debilitating fall.
The other big event this week (and we'll leave politics out of this) is the August employment report on Friday. This report will drive the market's expectations regarding the possibility of a QE3 announcement at the Sept. 12-13 FOMC meeting. A number below 100,000 on nonfarm payrolls is certain to boost the market's belief that QE3 is on the way. The current Briefing.com consensus estimate stands at 130,000.
In the meantime, the August ISM Index (Briefing.com consensus 50.0; prior 49.8) will be released at 10:00 a.m. ET today along with construction spending data for July (Briefing.com consensus 0.5%; prior 0.4%). Auto and truck sales for August will be published throughout the day.
Over the weekend, China's official PMI reading tipped into contraction territory at 49.2 versus 50.1 in July. The natural instinct is to think this reading will boost the case for policy stimulus out of China. It may, yet Asian markets ended mostly lower. Maybe there is some attention being paid after all to the weakening fundamental outlook. But probably not. The reaction to the ECB decision on Thursday will tell us more.
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
