The time has come.
After endless speculation, the market will find out in the coming week if the
is finally ready for a pause after two years of nonstop interest rate hikes.
The Federal Open Market Committee meets Tuesday to make its latest rate decision, and for once, traders aren't sure what to expect.
"This is the first time in several years that Wall Street does not have a firm grip on the Fed's intentions in advance of their meeting," says Rich Yamarone, chief economist at Argus Research. "So next week is going to be a barnburner."
Friday's jobs number may have erased some of the uncertainty, at least in the market's opinion. The Labor Department reported that the U.S. economy added 113,000 nonfarm payrolls in July, short of economists' expectation for 145,000 new jobs.
The shortfall marked the fourth consecutive month of soft jobs data, and the odds of a hike Tuesday tumbled to 18.5% from 42%. A pause would keep the fed funds rate at 5.25%, a level it reached after 17 consecutive 25-basis-point rate hikes since June 2004.
"If you just follow the data -- weakening retail sales, slowing GDP, four consecutive weak employment reports -- then you will find it difficult to make the case for another rate hike," says Jason Schenker, an economist at Wachovia.
Though the market has been keenly focused on the Fed moves for months -- moving up at any sign of a break in the hikes -- it's not entirely certain that a pause will be followed by applause from the stock market. Friday's job data signaled an increased likelihood of a Fed break, but stocks ended down for the day as investors realized that a pause doesn't guarantee a soft landing in the economy, nor does it necessarily mean there won't be future rate hikes.
The Fed's accompanying policy statement likely will play a role in the market's reaction.
"With respect to interest rates and their policy statement, the Fed must choose language that counterbalances their decision on rates," says Randy Diamond, sales trader at Miller Tabak. "Right now, it looks like they will pause, but that should be combined with vigilant language on inflation. If the Fed does not take this course, an adverse market response would be most likely."
Distractions From the Fed
There will be some economic releases to absorb before the market feasts on the Fed's policy statement Tuesday afternoon, starting with June consumer credit figures on Monday. The consensus estimate, according to economists surveyed by Thomson First Call, is for consumer debt to come in at $3.6 billion, down from $4.4 billion in May.
Second-quarter preliminary productivity data is scheduled to be released on Tuesday morning before the bell. Economists are expecting a rise of 1.2%, down from a 3.7% rise in the first quarter.
Later in the week, wholesale inventory data for June arrives on Wednesday. June trade balance and July Treasury budget data are on tap Thursday.
Several economic reports are slated for release Friday, including June business inventories and import and export prices for July.
July retail sales figures will hit the tape Friday. Retail sales for last month are expected to have increased 0.6% after a drop of 0.1% in June. Excluding automobiles, economists project retail sales rose 0.5% in July, up from 0.3% growth the prior month.
"The ex-autos and ex-gasoline retail sales data is important to focus on because it effectively shows the impact of higher gas prices on the consumer," says Wachovia's Schenker. "The pressure on the consumer to keep spending has deservedly been front and center in this economic picture because consumer spending makes up 70% of the U.S. economy."
Still More Earnings
The bulk of earnings may be behind us, but there are still some big names on tap to report quarterly results in the coming week.
On Monday, the market will hear from the likes of
Tuesday's earnings lineup includes
Other big-hitters scheduled to state their cases on Tuesday are
will announce results after the bell Tuesday. According to Thomson First Call, analysts expect Cisco to post earnings of 28 cents a share, up from the 25 cents a share it earned last year, on $7.92 billion in revenue.
Entertainment companies will be in the spotlight Wednesday, as
Other companies reporting Wednesday include
American International Group
Thursday will be another busy day on the earnings front highlighted by companies including
Four Seasons Hotels
Thursday will also be a big day for retailers, with earnings announcements from
is scheduled to release its results on Thursday as well. The discount retailer said last week that it expects to meet or exceed the First Call average analyst estimate of 69 cents a share.
Friday's earnings schedule mostly features reports from foreign companies, such as