It's a make-or-break week coming up for the markets, with interest rates, oil prices, the dollar, earnings and technical factors all coming into play.
The
Federal Reserve's
policy announcement Wednesday will take center stage again, as Ben Bernanke & Co. continue to walk their economic tightrope.
Expectations for a rate cut have been pared in size over the last few weeks -- predictions are now for a 25-basis-point cut, to 2%, as opposed to the 50-basis-point cut anticipated earlier. This change comes as the markets have appeared to stabilize, and concerns about the weak dollar and high commodity prices have continued to swirl.
Market watchers seem to feel that the Fed is likely to pause for a while after this rate cut, and wait to see how the cuts already made play out. That sentiment is already
causing the dollar to rally
.
"The Fed has done a lot, and with
rate levels coming into the neighborhood of where they need to be, 25 vs. 50 is less critical. Other things start to weigh," says James Glassman, senior economist at JPMorgan Chase. "The belief is, they've got things about right, so they don't need to keep accelerating."
Glassman believes the economic downturn will be over by the summer or fall. "The wheels aren't coming off the wagon like you think of when you think recession," he says.
"People will be looking for any hint of a pause," observes Bill O'Donnell, rate strategist at UBS. But, he notes that "the Fed's efforts to get loan rates down are being sterilized by the conditions in the credit markets. That makes us believe that official rates will have to go lower than the market thinks to stimulate economic formation."
As for the markets themselves, last week, the major indices scraped by with small gains. The
Dow Jones Industrial Average
added 0.3% to 12891.86, the
S&P 500
increased 0.5% to 1397.84, and the
Nasdaq Composite
pulled 0.8% higher to 2422.93.
Greg Collins, CEO of Fountain Hill Investments, sees some encouraging signs.
"The S&P marked its highest close in three months. Transports are at seven-month highs. Stocks are looking out past this malaise and betting on the prospects for further improvement," he notes.
"The question is whether a prolonged consumer-driven recession is on the horizon and how much of that is priced into stocks at the moment," Collins says, qualifying his optimism. "The consumer remains on life-support and choking on record debt levels."
James Paulsen, chief investment strategist at
, points out that "we're toying with a huge technical" in a couple of areas -- the S&P 500 is hovering around the critical 1400 level, while the 10-year Treasury is near 4%.
"We're going to be bouncing up, seeing how we do, seeing if we fade, or if we blow through," he says.
Oil is a particular concern into next week, too, as crude continues to hover at record price levels.
brought about by strike developments in Scotland and Nigeria have exacerbated the trend.
"Every week we have these big ranges, with prices closing toward the upper end of the weekly range," says Tom Bentz, director and senior energy analyst at BNP Paribas Commodity Futures. "That tells me we haven't found a top yet, from a technical standpoint."
However, Bentz points out that if the strikes end fairly quickly or the dollar begins to rebound, there could be a substantial correction in crude.
A number of major oil companies report their earnings next week. Dow components
Exxon Mobil
(XOM) - Get Report
and
Chevron
(CVX) - Get Report
announce results Thursday and Friday, respectively.
Marathon Oil
(MRO) - Get Report
reports Thursday, while
BP
(BP) - Get Report
and
Royal Dutch Shell
(RDS.A)
come out on Tuesday.
In addition, rebate checks from the U.S. government, part of the economic stimulus package passed in February,
will start to show up in bank accounts
next week. Many commentators believe that these checks will help consumers maintain their confidence, though similar efforts in past years haven't necessarily borne much fruit in that regard.
Credit-card companies
Visa
(V) - Get Report
and
MasterCard
(MA) - Get Report
report earnings on Monday and Tuesday respectively, which could help show the financial condition of the consumer. Other insights about the consumer could be gleaned from reports from
Colgate-Palmolive
(CL) - Get Report
,
Kraft Foods
( KFT) and
Procter & Gamble
(PG) - Get Report
on Wednesday.
Other notable earnings releases next week come from mortgage-crisis poster child
Countrywide Financial
( CFC), blue chips
Verizon
(VZ) - Get Report
and
General Motors
(GM) - Get Report
, and technology titan
Sun Microsystems
(SUNW) - Get Report
.
As suppositions grow that the economy is currently in a recession, eyes will be on the advance estimate from the
on gross-domestic product on Wednesday to find out whether the U.S. is on its way down that road.
Also, jobs data will be in focus. On Friday, the
will release payrolls data, which are expected to show declines. The unemployment rate, also released that day by the Labor Department, is predicted to increase from 5.1% to 5.2%.
O'Donnell points to the jobs data and some housing numbers, such as the S&P/Case-Shiller home-price index and National Association of Realtors data on number of vacant homes for sale, as other key metrics to watch to figure out where the economy is.
He's also more pessimistic about the state of the economy than many of his peers.
"We've had an oil-driven recession, we've had credit-driven recessions and housing recessions. We've never had one with all three," he says. "This is going to be the big one."
