Federal Reserve Chairman Alan Greenspan will begin waving goodbye to financial markets this Tuesday by raising official interest rates by a quarter point for the 13th straight time. What Greenspan says during his farewell will help determine whether it's a fond one. Arguably, Tuesday's meeting of the Federal Open Market Committee is as eagerly awaited as any Fed meeting this year. That's because investors want to see if the FOMC drops its longstanding language to tighten monetary policy at a "measured pace." "We're seeing a 50-50 chance that there could be some change in the language," said Arthur Hogan, chief market analyst with Jefferies. "That means we're getting close to the end, and the market can breathe a bit easier." Hogan believes the Fed should pause when its overnight lending rate reaches 4.5% (this week's hike will bring it to 4.25%). He said the Fed tends to overshoot on rate-tightening because of the lag time before higher interest rates show up in economic data. There have been few sings of stasis in recent economic data. Third-quarter GDP growth was measured at a robust 4.3%, and the economy added 215,000 nonfarm payrolls in November, beating Wall Street's estimates. Meanwhile, inflation gauges were tame. Hogan predicted the Fed will probably stop raising rates at 5%. "We've got a new chairman coming onto the job who will probably keep tightening for a few months to show his inflation mettle," Hogan said, referring to President Bush's appointee for the job, former Fed governor Ben Bernanke. No change in the Fed's message next week could keep the market in check for the rest of the year after a strong rally in November. "I have no concern about a significant pullback, but the cross-currents of the end of this year will probably keep a lid on things after we got so aggressive in November," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum.
Stocks finished last week lower for the second time in a row after a five-week rally bolstered hopes for a big bull run. The Dow Jones Industrial Average dropped 0.9% for the week, while the S&P 500 shed 0.4%. The Nasdaq Composite lost 0.7%. Next week could be choppy thanks to a large menu of fresh data. A smattering of inflation data will hit the tape after the Fed announcement, starting Wednesday with a report on import-export prices in November due out from the Labor Department before the opening bell. The Commerce Department is also expected to report that the U.S. international trade deficit shrank to $63 billion in October. On Thursday, the government is expected to report before the opening bell that its consumer price index dropped by 0.4% in November, largely due to a decline in energy prices. Excluding food and energy prices, economists expect the so-called core index to have increased 0.2% for the month. Later Thursday, the Fed is expected to report that industrial production increased by 0.5% in November, which would mark a slowdown in the previous month's blistering pace of 0.9%. Factories are estimated to have been operating at 79.8% of capacity in November. Also, the Philadelphia Fed is expected to report that its regional manufacturing index rose to 14 in December from last month's reading of 11.5. Before the Fed's announcement on Tuesday afternoon, the government is expected to report that business inventories rose 0.5% in October, matching the pace set in September. The pivotal data will come before the opening bell, when the Census Bureau is scheduled to release retail sales numbers from November, which include two key shopping days over the post-Thanksgiving weekend. Economists on Wall Street are forecasting that retail sales rose 0.4% for the month after they slowed by 0.1% in October. Excluding auto dealerships, sales are expected to be up 0.1%, after jumping 0.9% by that measure in the month before.
With the holiday shopping season in full swing, consumer spending remains a wild card for the future health of the economy. More signs emerged last week of a slowdown in the housing market when homebuilders Toll Brothers ( TOL) and Hovnanian ( HOV) issued uncertain profit forecasts. Since real estate wealth has been a main engine of spending for consumers in recent years, a decline in the housing market could coincide with a pullback. Also, energy prices remain a burden on consumers, with crude oil prices hovering around $60 a barrel and natural gas prices also high. With the winter chill setting in along the crowded Northeast corridor, investors don't know what to expect from home heating bills. With this in mind, they're keeping a close eye on any indicators of the strength of holiday spending. "We need to see how much high energy prices are going to affect consumer discretionary spending over the holiday," Hogan said. "Natural gas prices, on a percentage basis, are up almost twice as much as crude oil, and I think that has to be factored into a lot of models. If we work our way through the season, and things turn out all right, we'll be a lot more confident." Best Buy ( BBY), the leading consumer-electronics retailer, will report third-quarter earnings on Tuesday, and analysts will be listening on its conference call for any hints about how the holiday season is going. Also, KB Homes ( KBH) is expected to report earnings Thursday, along with Lennar ( LEN), giving Wall Street another look at the homebuilding sector. While housing may be slowing, other key sectors have been gaining steam, like technology and financials. Solid results from chipmakers like Intel ( INTC) and National Semiconductor ( NSM) powered the Philadelphia Semiconductor Index to a gain of 1.8% on Friday. It's up 15% since the start of November. The Philadelphia/KBW Bank Sector is up 5% during that span. "Sectors that should be leading the market are starting to show some signs of life again," Hyman said. "That bodes well for the market over the long haul."