Skip to main content
at the bell

It's federal budget week. But despite Canada's enviable position in being able to plan to balance its budget within four years, the government will not be basking in the global spotlight.

Instead, some of the world's leading central banks will set the market's tone this week.

The European Central Bank will release its latest economic forecasts for the 17-member euro zone on Thursday, and some economists anticipate that it will raise forecasts for growth and inflation.

That implies that even with Greece teetering on the edge of bankruptcy, the ECB will increase interest rates again soon. The market won't be surprised if ECB president Jean-Claude Trichet signals on Thursday that a hike is coming in July.

The Bank of England, meanwhile, is almost certain on Thursday to maintain rates at their record low 0.5 per cent, even as inflation has geared up to 4.5 per cent. That's because as the global recovery sputters, the country is showing barely any economic growth at all.

At the U.S. Federal Reserve, the issue this week won't be rate cuts, but whether the world's most powerful central bank will launch another round of quantitative easing after its most recent round, dubbed QE2, concludes June 30.

Investors will analyze chairman Ben Bernanke's speech Monday to the International Monetary Conference in Atlanta for clues as to how the Fed will react to the recent slew of weak economic data.

In Canada, first-quarter figures for GDP growth looked strong at first glance, but a dissection of the results showed that domestic demand was flat. The 3.9-per-cent growth rate was built on the back of volatile exports and inventory accumulation, according to Mark Hopkins, a senior economist at Moody's Analytics.

In the U.S., disappointing results last week included news that the private sector added only 83,000 jobs in May, down from an average gain of 244,000 in each of the prior three months.

With the U.S. unemployment rate creeping upward again to 9.1 per cent, it's now apparent that the Fed has "failed miserably" to kick start job growth with its stimulus, says Colin Cieszynski, analyst at CMC Markets Canada. In fact, the more-than-$2-trillion (U.S.) the Fed has spent to buy government bonds and mortgages appears only to have pushed up stock and commodity prices and created stagflation, he says.

Roland Chalupka, chief investment officer for Fiduciary Trust Company of Canada, isn't expecting the Fed to start shrinking its balance sheet at this stage of the recovery. But he also doesn't believe the central bank will launch QE3. "It only has so many arrows in its quiver, and at some point [the tactic]becomes less effective," he says.

Mr. Chalupka's thinking reflects growing sentiment among professional money managers that the markets now need to look beyond the Fed for support.

Bill Gross, who manages the world's largest bond fund at Pacific Investment Management Co., told Bloomberg on Friday: "We don't see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program."

Instead, he sees the Fed capping lending rates for an extended period of time.

Some investors have been betting that more stimulus from the Fed would lift stocks even higher, regardless of broader economic conditions. Without those funds, major stock market indices are likely to lose ground, but remain above where they were before the Fed first signalled its intentions for QE2 last August, Mr. Chalupka says.

He expects a volatile summer. However, there is enough money waiting on the sidelines that there should be a rebound at some point after September, as investors take advantage of lower prices.

Interact with The Globe