Coming Week: Spotlight on Central Banks

The Fed's task is complicated by last week's inflation reports, as well as Friday's stronger-than-expected industrial production/capacity utilization report. Friday's consumer price index was only slightly above expectations, but at 2.7%, the year-over-year change in the core rate remains above the Fed's so-called comfort zone.

In the wake of those reports, "the best we can hope for from the Fed is a change in the accompanying statement acknowledging the slow down and the possible impact that subprime lending may have on the overall economy," writes Robert Pavlik, chief investment officer at Oaktree Asset Management. "Wording to this effect will be taken as the FOMC is positioning itself for a potential rate cut later his year should inflation decline."

Such an outcome would presumably encourage the bulls, who have alternately argued that the subprime issue either is not a threat to the broader economy or is serious enough to prompt Fed rate cuts that will spur rising asset prices. (In technical terms, this is known as "heads bulls win, tails bears lose" theory.)

Still, the Fed finds itself in a box: It needs to reassure the financial markets it is closely monitoring the subprime situation and will act accordingly, if necessary. But at the same time, the Ben Bernanke-led Fed needs to restate its vigilance against stubbornly high inflation pressures or it will risk losing its hard-earned credibility. The latter scenario could send the dollar into rapid retreat and prompt an unwinding of the yen carry trades mentioned above.

In other words, Bernanke had better practice his tightrope walking this weekend.

Other News and Notables

Other economic events next week include the index of leading economic indicators Thursday and existing-home sales data on Friday. Scheduled corporate events include earnings from FedEx(FDX Quote), which reports Wednesday, and KB Home(KBH Quote) and Nike(NKE Quote), both of which report Thursday.

Then there are the unscheduled events. What will become of what Jim Cramer calls the "rumored stocks," such as Dow Chemical(DOW Quote) and Alcoa(AA Quote)? Any merger or leveraged-buyout news for those or other big-caps would likely reinvigorate the animal spirits.

That said, given how this past week's losses pretty much wiped out the prior week's rebound, the animal spirit most evident on Wall Street these days seems to be of the ursine variety.

Caveat emptor.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting