The Bank of Japan and the U.S. Federal Reserve look set to save their ammunition as they meet to review policy against a backdrop of tentative signs of stability returning to banks and financial markets.
European stocks stumbled in early trade on Tuesday after five days of gains, highlighting the fragility of financial markets. Falls were driven by oil companies and by banks, beneficiaries of recent rises, on concern over rising credit card defaults in the United States.
"It is the continuing battle between the recovery and the economy and the realisation that corporate results are still going to be poor for the time being," said Justin Urquhart Stewart, investment director at Seven Investment Management.
Both the Fed and the BOJ will take another hard look at their arsenal as they start respective two-day policy meetings on Tuesday to see what else they can do to battle the worst global downturn since the 1930s after slashing rates virtually to zero.
The Bank of Japan may discuss whether to expand its purchases of government bonds to pump more funds into an economy mired in its deepest slump in decades, though markets are not sure whether it will decide to act this week.
The Fed has considered the purchase of long-dated government debt to its unconventional policies too, but a number of policymakers have sounded sceptical about the idea and few Fed watchers expect such a move this week.
"Investors are hoping for government debt purchases by the Fed although they think the central bank may not immediately take such a step," said a senior bond trader at a Japanese brokerage.
Both the BOJ and the Fed look certain to keep their benchmark rates at 0.1 percent and 0-0.25 percent, respectively, when they announce their policy decisions on Wednesday.
They are also expected to highlight how much they have already done to jolt their economies back to life, with a stock market rally inspired by improved bank outlooks taking some pressure off the policymakers to act quickly again.
BANKING HOPES
Tokyo stocks gained 3.2 percent on Tuesday, underpinned by hopes that authorities will roll out new initiatives to help the economy, including more government stimulus spending and central bank purchases of banks' subordinated debt.
Asian stock markets minus Japan were up 1.7 percent to another one-month high, though investors remained cautious about longer-term prospects.
"Economic worries still exist and we have yet to see what kind of measures are taken to shore up the U.S. financial system and to aid the troubled automakers," said Kim Seung-han, an analyst at HI Investment & Securities in Seoul.
Britain's Barclays on Monday joined its U.S. peers Citigroup, Bank of America and JPMorgan Chase with an upbeat outlook, saying business was off to a good start this year.
A report later by American Express that more and more Americans were falling behind in their credit card payments served as a reminder of the toll the financial crisis is taking on U.S. consumers and snapped a four-day rally on Wall Street.
The Japanese government on Monday offered the gloomiest assessment of the world's second-largest economy since 2002 in its monthly report and there was ample evidence that the world's No. 1 economy was also sinking deeper into recession.
U.S. industrial production fell for the fourth straight month in February, the Fed said. A report from the New York Federal Reserve Bank said an index of manufacturing in the state fell to a record low in March.
Figures on the U.S. housing market — at the heart of the global crisis that began with a surge in U.S. mortgage defaults — are expected to show later on Tuesday that housing starts slumped to another record low last month.
NO MAD RUSH
Economists expect more grim news from Europe later on Tuesday when the influential ZEW economic sentiment gauge for Germany is expected to show a fall again this month after a brief spike in February.
There are signs, however, that after slashing borrowing costs at a furious pace for months and committing hundreds of billions of dollars in bailouts and stimulus packages policymakers are beginning to use their arsenal more sparingly.
The Federal Reserve is expected to reaffirm its commitment to do whatever necessary to battle the recession, but its focus is likely to be on its consumer credit support programme due to be launched this week.
In Japan, many economists expect the central bank to hold off raising the volume of its outright government bond purchases until the government announces new spending measures.
And in Australia, central bank minutes showed that it considered cutting rates earlier this month, but in the end held back so that it could gauge the effect of past easing, even as grim economic data poured in.
In the euro zone, European Central Bank Executive Board member Juergen Stark said there was some room to cut the bank's benchmark again from the present all-time low of 1.5 percent, but the bottom was not far away.
"We have a little more wiggle room on reducing rates," Stark told the Handelsblatt daily. "For me personally though, the threshold is not far from where we are now."
