QE3 still on the table

If it weren’t for the Federal Reserve, nobody would know about the existence of the Jackson Hole Mountain Resort in Jackson, Wyoming. But since 2009, the market has focused its attention on this very small place in the hopes of hearing some very big monetary policy announcements.

We’ve never seen actual policy announced by the Federal Reserve at this economic symposium, but Ben Bernanke has sometimes hinted that policy changes could be on the way. Considering the recent positive performance of the stock market, it would be fair to say that investors are expecting some further monetary easing, which we will call Quantitative Easing III (QE3).

Bernanke didn’t reveal any changes. If any policy announcements are to come, they are more likely to be revealed at the upcoming FOMC meeting September 12-13. Mario Draghi, the European Central Bank President, was supposed to address the symposium on Saturday morning, but cancelled his appearance. He has lots to deal with in Europe, including the next ECB meeting that will be held on Wednesday.

Read: August enthusiasm cools

Market expectations were declining going into the meeting, which led to downward pressure on North American indices, but we did see some gains after Bernanke’s remarks since QE3 wasn’t removed from consideration.

Offsetting some of the weakness in Canada were strong quarterly results from the Big Five banks, along with dividend increases at each institution.

Read: Why to buy dividend stocks now

Bank of Nova Scotia’s stock lagged the group on the week as it announced its intention to buy ING Bank of Canada for $3.13 billion in cash.

Even with all the monetary policy chatter, we didn’t see a great deal of movement in the U.S. dollar this week. However, Bernanke’s comments did provide a bit of weakness Friday afternoon. As a result, gold prices jumped over US$30 per ounce and the Canadian dollar increase almost three quarters of a cent.

Oil prices were relatively flat as Hurricane Isaac was thankfully more of a disruption to the oil industry instead a disaster of Hurricane Katrina proportions.

TRADING WEEK AHEAD

The next two weeks are going to be very influential in shaping investor sentiment for the rest of 2012. Two key events include the European Central Bank meeting on Wednesday, September 6 and the next Federal Open Markets Committee meeting on September 12-13.

While the Fed will always influence market sentiment, I’d say the ECB meeting next Wednesday will likely be one of the more important events of the year.

While the U.S. economy may not be where we’d like to see it at this stage of the economic recovery, there is more stability in the U.S. financial system at this time compared to 2008 and U.S. treasuries continue to see demand at low rates.

The same cannot be said for Europe, and that’s why we need to see some progress from Mario Draghi and the ECB next week to illustrate that appropriate steps are being taken to provide liquidity to European banks, stimulate economic growth, and lower the costs of sovereign financing.

Read: Eurozone: All talk, no action

Draghi essentially said the ECB will do what it takes to solve the financial crisis, and the market is hoping action commences next Wednesday. Once these shorter-term steps are taken, then Eurozone nations can move toward a fiscal union.

We will also see U.S. and Canadian employment reports for August on Friday, along with the ISM Manufacturing and Non-Manufacturing indices during the week.

The U.S. is expected to see job growth continue as non-farm payrolls are expected to increase by 127,000 jobs and the unemployment rate is expected to remain unchanged at 8.3%. Republicans will argue that the number is not high enough three years after a recession, while Democrats will emphasize that August could be the 30^th consecutive month of private-sector job creation when that party gets together for its quadrennial convention next week in North Carolina.

In Canada, economists are expecting employment to increase by 11,000 jobs, but this data should have little impact on any decision from the Bank of Canada which will issue an interest rate announcement on Wednesday.

The week will be dominated by macroeconomic events and monetary policy announcements as few companies are reporting earnings. Commodity markets could be active depending on how the U.S. dollar responds to the data and the monetary policy decisions. Regardless, the loonie will likely remain above parity for the time being.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP