As the Federal Reserve moves closer to scaling back its monetary stimulus, central banks in the rest of the world may get another reminder this week of just how tough it is to decouple from U.S. interest rates.
German and British bond yields tracked U.S. yields sharply higher on Friday following solid U.S. jobs data, a day after the European Central Bank and the Bank of England, anxious to protect their economies from rising U.S. borrowing costs, said they would keep short-term rates firmly anchored near zero.
Minutes of the Fed's June 19 policy deliberations, due out Wednesday, could put further upward pressure on bond yields if they show broad support for phasing out the central bank's asset purchases, now running at $85 billion a month.
Fed Chairman Ben Bernanke caught markets off guard by announcing after that meeting that the bond buying could run its course by mid-2014, depending on job market developments.
"You can imagine a story where bond yields are dragged higher. Obviously policy makers here and in Europe won't be too pleased with that," said David Owen, chief European financial economist with Jefferies in London.
"All they can do is to try to reiterate that, from the point of view of the macro economy, Europe and the UK are not in the same space as the U.S. and so neither the ECB in particular, nor the Bank of England, is going to be raising rates for a very long time," he added.
Bernanke will have the chance to set the record straight as he is due to give a speech hours after the minutes come out.
Victoria Clarke, an economist with Investec in London, said the Fed chief and his deputy, Janet Yellen, probably favored a careful withdrawal of stimulus.
"But we should also caution that the minutes risk a round of further nervousness, given that they will cite not only the views of the more influential voting members, but all members including those who are keen for a more aggressive exit to take place," Clarke said in a note.
JOBS GAIN MOMENTUM AT LAST
Friday's employment report can only strengthen the hand of the Fed's hawks.
The economy added 195,000 payroll jobs in June, and the average monthly increase since September exceeds 200,000 - the threshold many think needs to be breached for growth to advance from its well-established rate of around 2 percent.
Bruce Kasman, an economist with J.P. Morgan in New York, now expects the Fed to start whittling down its bond buying in September. Before the jobs data he had thought the central bank might wait until December.
"The Fed has gotten what it needs to begin tapering. The substantial improvement in the labor market is there," Kasman said on a conference call.
JAPAN UP, CHINA DOWN
Japan also has wind in its sails at long last, and the Bank of Japan – engaged, like the Fed, in a vast expansion of its balance sheet – is expected to upgrade its outlook of the economy for the seventh month in a row.
"Japan will outperform other developed markets for the rest of 2013," said Patrick Zweifel, chief economist in Geneva for Pictet Asset Management.
He said political risks facing the eurozone remained a concern, as last week's government rift in Portugal showed. But, even though May industrial output is likely to have edged down, Zweifel said economic headwinds were abating and the 17-country area could eke out modest growth in the second half of 2013.
By contrast, China, the world's second-largest economy, is likely to report sluggish exports and imports with deflation entrenched at the wholesale level, a tell-tale sign of overcapacity plaguing many industries, including shipping.
On Friday, China's largest private shipbuilder appealed for financial help from the government and big shareholders after cutting its workforce and delaying payments to suppliers.
"Despite recent signs of bottoming out in domestic activity, growth outlook remains fragile," said Tao Wang, UBS's chief China economist.
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