Coming Week: Not There Yet

The stubborn credit crisis on Wall Street, like the economy, also has improved, but is far from being well.

T.J. Marta, fixed income strategist with RBC Capital Markets, notes that credit spreads indicate the financial markets are "less dislocated than they were," and he says "we've survived the worst of this storm." Such sentiments have led to speculation that the Federal Reserve will keep its 2% federal funds rate target in place at its next meeting in June amid rising signs of inflation. That view was bolstered last week by the Fed's latest policy statement, in which the central bank removed a previous reference to "downside" risks to growth, while noting that past federal funds rate reductions and "ongoing" liquidity measures should help spur an economic recovery.

Friday, however, showed that the Fed is still busy pumping liquidity into shaky markets at home and abroad. It announced that it was increasing the size of some cash auctions for financial institutions through its term auction facility and the amount of dollars it provides to the European Central Bank and the Swiss National Bank. Also, the Fed said it will lower its standards on collateral it will accept for term securities lending facility loans to include AAA-rated asset-backed securities.

"The Fed has thrown a lot of things at the wall to see what would stick in this credit crisis, and the [term auction facility] auctions and the swap lines are the things that seem to be working the best, and so the Fed is ramping those up," says Marta. "They seem to have the right combination, and going forward, we're going to see spreads continue to normalize."

Crude oil futures responded to the Fed's actions by rallying up $3.80, or 3.4%, to settle at $116.32. Gold also rallied on speculation that the dollar's recent rebound will prove short-lived.

"The Fed's primary concern here is repairing the credit system and they're willing to tolerate inflation for a while to do that," says Joseph Brusuelas, chief economist with Merk Investments.

This week, another batch of first-quarter earnings are in store, with companies like Walt Disney DIS, Fannie Mae FNM and UBS UBS on tap.

Investors will be increasingly focused on the weak dollar and oil prices as a sign of how financial markets and consumers will fare as the economic downturn runs its course.

On Monday, economists expect the Institute for Supply Management to report that its index tracking economic activity in the service sector ticked down to 49.5 in April from 49.6 in the previous month. Then the government is expected to report that first-quarter productivity slowed to a 1.2% growth rate from 1.9%.

On Thursday, the government is expected to report that wholesale inventories grew by 0.4% in March, and then on Friday, the government is expected to report that the U.S. trade gap narrowed to $61.3 billion that month.

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