Stock exchange traded funds followed the Dow’s 130-point move lower Monday before the Federal Reserve begins its two-day meeting to discuss the economy and monetary policy.
Also this week, markets will be monitoring meetings of the European Central Bank of G-20 political leaders. [ETFs in Risk-Off Mood]
On Wednesday, investors will get the Fed announcement followed by a press conference with Chairman Ben Bernanke.
“In recent speeches, various Fed officials have discussed further measures they might take to boost the economy,” said David Kelly, chief market strategist at JP Morgan Funds. “However, given the sharply diminishing returns and market distortions generated by their most recent moves and signs of economic resilience, they will likely pass on taking any further action at this point.”
Federal Reserve Bank of New York President William Dudley recently said the Fed wants to keep mortgage interest rates low and may do more to hold down borrowing costs, Bloomberg reported.
The ECB also meets this week with Mario Draghi taking over as chief from Jean-Claude Trichet.
“Despite optimism following last week’s meetings of European leaders, the cold reality is that Europe may be slipping into recession as a result of continued uncertainty and fiscal austerity,” JP Morgan’s Kelly wrote in a weekly outlook. “While current economic weakness does seem to justify reversing the ECB’s tightening moves from earlier this year, the new Italian ECB head may want to avoid appearing overly dovish from the outset while continued ECB support for peripheral debt already constitutes monetary easing of a sort.”
President Obama will attend G-20 summit meetings this week, and again, leaders will likely be discussing the debt deal.
“Most observers recognize that this agreement contains significant flaws,” Kelly noted. “Even with a 50% haircut to Greece’s privately held debt, it is hard to see how Greece’s debt/GDP ratio can be stabilized without a revival in economic growth, that, in turn, may require substantial fiscal transfers. However, the flexibility and determination of European leaders in working towards last week’s agreement augers well for eventual decisions in this direction.”
In economic data, the week’s big report is the October update on nonfarm payrolls, which crosses Friday.