The market will be on alert next week for the latest signals about the health of the economy -- and, by extension, how deeply the

Federal Reserve

may cut interest rates at its next meeting.

After Friday's dismal jobs report, which showed the economy lost 4,000 jobs in August, some market participants warmed to the idea that the Fed may cut interest rates prior to the scheduled Sept. 18 meeting of the Federal Open Market Committee. Others say the question is not when, but how much -- 25 basis points or 50 basis points.

The Fed, which has kept the fed funds rate at 5.25% for over a year, could cut early "using the weak data as a way to show that it is responding to the economy and not the markets," writes Randy Diamond, trader at Miller Tabak.

The fed funds futures market now prices in 100% odds of a cut in September and 40% odds of a 50-basis-point cut, according to Miller Tabak. The market prices in 100% odds of 75 basis points worth of cuts by year-end, which would bring the fed funds rate to 4.5%.

Traders will hear from several Fed speakers next week, though the officials may well play their cards close to the vest. This past week the central bankers didn't stray from the relatively sanguine economic outlook the Fed has kept up for months.

On Monday, speakers include Atlanta Fed President Dennis Lockhart, San Francisco Fed President Janet Yellen, the Dallas Fed's Richard Fisher and Federal Reserve Governor Frederic Mishkin. Tuesday, Fed Chairman Ben Bernanke speaks on Global Imbalances at a conference in Germany. Then all goes quiet until the FOMC meeting the following Tuesday.

Diamond adds that a premeeting cut may help quell anxieties about the economy that an expected 25-basis-point cut on Sept. 18 may not. "The $64,000 question on everyone's mind is, 'Are we in a recession?'" he adds.

Traders will watch the credit markets for signs of loosening. For two months, investors have recoiled from investments attached to mortgage-backed securities. Prices of short-term company debt in the commercial paper market declined an unprecedented 11.6% in August, according to Moody's Investor Service.

Traders will also be looking at commodities prices, which have remained relatively stable, and they'll be looking for signs of life from the banking system.

Brokerage company earnings commence the following week, but traders are watching closely for how banks fare in selling the debt attached to mega-leveraged buyout deals for companies like

First Data

(FDC) - Get Report

and

TXU

( TXU). If any of these deals are well-received by investors, the financial stocks could breathe a sigh of relief.

Shares of banks like

Lehman Brothers

( LEH),

Bear Stearns

( BSC),

Goldman Sachs

(GS) - Get Report

,

Citigroup

(C) - Get Report

and

JPMorgan

(JPM) - Get Report

have suffered as M&A deals stalled this summer. The underwriters were left with nearly $300 billion of debt on their balance sheets.

The markets will also be watching for signs of weakness to develop in Europe, which has stalled its monetary tightening campaigns amid the recent credit crunch. Investors may be concerned about big bets on the global economy given some recent warning signs.

FTN Financial's chief equity strategist Tony Dwyer notes that German factory orders were down 7.1% in August -- their worst level since 1991. He also points out that Euro-zone business spending reported for the second quarter was negative. This could pressure basic materials and energy stocks, Dwyer believes.

As for the U.S., there's plenty of economic data to chew on. Retail sales on Friday is likely the most important, says Moody's chief economist John Lonski, adding it may be better than expected given last week's encouraging back to school sales reports.

Friday also brings August's report on industrial production, capacity utilization, business inventories and the first read on September consumer sentiment with the University of Michigan survey. Initial jobless claims come out Thursday.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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