Asian stock markets ended with gains last week after the European Central Bank announced a plan to reduce the borrowing costs of struggling euro zone countries and Chinese regulators approved more infrastructure projects, which should stabilize and restore growth in the world's second-largest economy.
Market participants will be watching the U.S. Federal Reserve's Federal Open Market Committee interest rate decision on Thursday. After the introduction of the new bond-buying program by the ECB, the Fed is widely expected to announce further measures when it closes its two-day meeting.
The recent batch of disappointing economic readings, including the weaker-than-expected U.S. non-farm payroll data, intensified fears that the economic recovery in the world's largest economy was losing steam. The U.S. Labor Department reported that only 96,000 jobs were added in August, far worse than economists' expectation of 145,000, while the unemployment rate declined to 8.1 percent on a falling labor force participation rate.
Investors are hoping the weak jobs data will force policymakers to announce further monetary easing measures to strengthen the recovery. At the Economic Policy Symposium at Jackson Hole, Wyo., on Aug. 31, U.S. Federal Reserve Chairman Ben Bernanke said the central bank would take additional measures if necessary, which was taken as an indication of a stronger push for QE3.
The minutes from the most recent FOMC meeting noted that many members saw additional stimulus might be warranted fairly soon unless new data indicated a sustainable strengthening in the pace of recovery. The U.S. economy needs employment growth of 100,000 just to maintain stability in the job market. But this is the fourth time in the past five months that it has added fewer than 100,000 jobs, which is disappointing by any measure.
We believe the FOMC will extend its forward guidance on the level of the Fed funds rate and announce a new large-scale asset purchase program at its 13 September meeting. Following Bernanke's speech at the Jackson Hole symposium, market participants have shifted expectations for more monetary accommodation by the Fed, said a note from Credit Agricole.
According to the official data released Sunday, China's annual rate of consumer inflation rose to 2.0 percent in August from 1.8 percent in July. The country's Producer Price Index dropped 3.5 percent in August from a year earlier, according to data released by the National Bureau of Statistics Sunday. China is set to release other data later in the day and in the coming days, and the market participants are likely to focus on them.
India will report July industrial production data Wednesday and the August WPI inflation data Thursday. Analysts at Credit Agricole expect a stabilization of the WPI inflation at a relatively high level at the same time uninspiring growth in industrial output, which would reduce the odds of a Reserve Bank of India rate cut this month.
South Korea is expected to announce another rate cut by 25 bp to provide support for growth as inflation is running at very low levels. Japanese current account surplus is expected to be narrowed to 660.0bn yen in July from 773.6bn yen in June while core machinery orders for the month of July would continue to increase by 1.5 percent on monthly basis.