The Coming Week: Interest in Rates

It could be a watershed week for the young rally in stocks as the Federal Reserve announces its next interest rate move.

The Federal Open Market Committee meeting on Tuesday and Wednesday is shaping up as a particularly dramatic one, with a debate raging over whether the policymaking body will cut rates by a quarter or half percentage point (few expect the Fed to leave rates unchanged).

On Thursday, The Washington Post cast its lot with the 50-basis-point camp, publishing a story suggesting Fed officials are willing to risk a big easing because inflation is practically nonexistent. The Wall Street Journal chimed in the next day, citing Fed officials who said a 25-basis-point cut was more likely.

According to the Chicago Board of Trade, the July federal funds futures are factoring in a 100% chance that rates will be cut by at least 25 basis points next week. But as of July 19, futures were split on whether that cut would be a quarter or half point, with futures assigning a 66% chance to the former and a 34% chance of the latter.

"You can make a case for 25. You can make a case for 50. But the Fed will probably say they expect an upturn, but the economic recovery is spotty and we're taking out insurance," said Jim Awad, president and market analyst at Awad Asset Management. "The economic data is mixed, on a rolling basis. It shows tentative signs of getting better, but they really are going to have to start hearing it from corporations. They'll have to say it's getting better. To say it's not getting worse won't hold recent gains anymore."

No matter what the Fed decides, Awad believes the upward momentum will continue for another week, if only because of end-of-quarter window dressing.

Sputtering Along

Last week, the Dow Jones Industrial Average shrugged off lukewarm economic data and posted a gain of 83.63 points, closing at 9200.75. The Nasdaq rose 18.54 points, ending at 1645.03, while the S&P 500 rose 7.10 points at 995.71. Since March 11, all three indices are up more than 20%.

"I think the market can come to terms with whatever the Fed decides. They're going to try to keep the rally alive for another week," said Awad. "People desperately want a good quarter after three bad years."

"People are going to try to keep the rally alive for one more week, and then comes the reality check, with the second-quarter earnings reports in July," Awad said.

In other economic releases, look for June consumer confidence figures on Tuesday morning before the FOMC meeting. Market watchers expect confidence to improve to 85 from 83.8.

On Wednesday, durable goods orders for May are expected to show 1% growth, up from a 2.4% slide in April, with existing home sales and new home sales also released on the same day. Thursday brings the final gross domestic product number for the first quarter of 2003, expected to show 1.9% growth, and the weekly jobless claims report. The week wraps up with personal income and personal spending data, and a revised look at the University of Michigan's sentiment number.

Earnings Nibbles

Second-quarter earnings season doesn't begin in earnest until July, but next week will bring a combination of earnings preannouncements and actual earnings releases from drugstore chains and international food conglomerates.

On Monday, Walgreen's ( WAG), the revenue leader in the drugstore space, will announce the results of its third quarter, providing an early look at retail earnings. Rite-Aid ( RAD) will also release its first-quarter results on Tuesday. Early in the week, look for earnings from fast-foodie Sonic ( SONC) on Monday, and shipping giant FedEx ( FDX) on Tuesday.

In technology news, handheld makers Palm ( PALM) and Research In Motion ( RIMM) will release earnings on Tuesday and Wednesday, respectively. Networking software and hardware maker 3Com ( COMS) will release earnings on Wednesday, as well.

Later in the week, international food manufacturers release quarterly results, starting with cereal maker General Mills ( GIS) on Wednesday. Thursday's the big day, however, with ConAgra Foods ( CAG), Del Monte Foods ( DLM) and International Multifoods ( IMC) all releasing earnings.

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