On Friday, U.S. Federal Reserve Chairman Ben Bernanke said that the central bank stands ready to bolster the economy if necessary, although he stopped short of giving an explicit signal of more monetary easing.
U.S. stocks rallied after Bernanke's speech to an annual conference of central bankers in Jackson Hole, Wyoming, with major indexes gaining more than 1 percent in the late morning session. At the end of the day the Dow Jones industrial average was up 0.7 percent, while the Standard & Poor's 500 Index was up 0.5 percent and the Nasdaq Composite Index up 0.6 percent.
"This (Bernanke speech) was in line with what we were expecting. He left the door open but didn't announce anything explicit. He doesn't intend to front-run his own FOMC (policy)meeting," said Liz Ann Sonders, New York-based chief investment strategist at Charles Schwab Corp, which has $1.6 trillion in client assets.
Investors are now awaiting comments from European Central Bank President Mario Draghi after the bank's meeting on Thursday. Many investors will look to the ECB meeting to glean strong clues on what to expect from the Federal Open Market Committee's own policy meeting next week on Sept 12-13.
"Between now and mid-September, we'll be focusing on the ECB, though the next FOMC meeting is also around the time that the German court meets, so we'll be getting news on both those fronts. Any news from Europe will drive markets more than domestic news, with the exception of the payroll report," Sonders said.
The all-important U.S. non-farm payrolls report is due on Friday. With Bernanke citing poor improvement in the labor market as part of the reason the U.S. economy faces "daunting" challenges, Friday's data could be a game changer, according to market participants.
In the euro zone, following the European Central Bank policy meeting on Sept. 6, a German Constitutional Court will rule on the euro zone's permanent bailout fund on Sept. 12, which may affect the ECB's bond-buying plans.
But there was further uncertainty within the ECB over President Mario Draghi's bond-buying plan on Friday after German central bank chief Jens Weidmann reportedly threatened to resign, piling pressure on Draghi to mollify opposition.
There are "growing hopes that Draghi has overcome Bundesbank opposition to announce a bond buying plan at next Thursday's ECB meeting," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.
But "what Draghi may have put in front of Weidmann is the notion that no actual purchases may ever occur as long as the market understands what it is up against in terms of coordinated, decisive policy response from the ECB."
ALL ABOUT THE JOBS
In a holiday shortened week, with U.S. markets closed on Monday for the Labor Day holiday, Friday's employment report will be the final major economic report to affect the results of the upcoming meeting of the Federal Open Market Committee (FOMC).
"Unless there is a sharp weakening in the labor markets, something our data do not indicate, the Fed will sit on the sidelines at the ready to act only if things get really bad," said Steve Blitz, chief economist at ITG Investment Research in New York.
A Reuters survey forecast nonfarm payrolls rose by 125,000 for the month of August.
In July, nonfarm payrolls added 163,000 workers, breaking three months of job gains below 100,000 and offering hope for the ailing economy. At the same time, a rise in the unemployment rate to 8.3 percent kept alive the possibility that the Federal Reserve could provide additional stimulus to the economy.
"The Beige Book prepared for the September 12-13 meeting of the Federal Open Market Committee (FOMC) offered little evidence of a material improvement in broad labor market conditions through Aug 20," Wilkinson said.
"Indeed, the trend in jobless claims has largely moved sideways over the summer. We forecast that total nonfarm payrolls increased by 110,000 in August, with the unemployment rate holding steady at 8.3 percent," he said.
Other economic data this week include the Institute for Supply Management manufacturing survey and construction spending on Tuesday; non-farm productivity and labor costs on Wednesday; the ADP private-sector employment report and weekly jobless claims on Thursday.
For the week the Dow jones was down 0.5 percent, while the S&P 500 was down 0.3 percent and the Nasdaq was down 0.1 percent. For the month, the Dow rose 0.6 percent, the S&P 500 gained 2 percent and the Nasdaq climbed 4.3 percent, its best monthly performance since February.
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