NEW YORK – Wall Street's focus will be squarely on the Federal Reserve's (search) interest-rate decision next week after weak jobs data raised questions about the pace of future hikes, while concerns about oil prices near $45 a barrel are likely to keep U.S. stocks under pressure.
Earnings releases will slow to a trickle as the second-quarter reporting season comes to a close. But a few key companies are still set to report, such as Cisco Systems (CSCO) and Wal-Mart Stores Inc. (WMT)
The economy will get most of the attention, with the centerpoint of the week the Federal Reserve's interest-rate decision Tuesday. Retail sales data for July on Thursday and the University of Michigan's August consumer sentiment survey Friday also will be eyed.
However, analysts see little relief from the market's current malaise, as investors fret about oil prices at 21-year highs, geopolitical worries and the economy losing steam.
U.S. stocks closed at the lowest levels of the year Friday after weaker-than-expected data from the July jobs report stirred investors' fears that the U.S. economic recovery may be weak.
For the week, the Dow Jones industrial average (search) fell 3 percent, closing Friday at 9,815.33, while the Standard & Poor's 500 Index (search) also dropped 3 percent, ending at 1,063.97. The tech-heavy Nasdaq (search) sank 6 percent during the week, finishing Friday's session at 1,776.89.
Despite this, Fed officials are still expected to add to June's quarter-point increase in interest rates and hike its fed funds rate target by another quarter percentage point to 1.5 percent on Tuesday afternoon, in order to ward off longer-term inflationary pressures.
While Friday's disappointing July jobs data made a rate increase less of a done deal, analysts think the main gray area is about the pace of rate hikes in the future.
"There's uncertainty about where the Fed will be at the year's end and whether it will skip a meeting, but as far as next week goes, the market expects a quarter-point rise. It would really be a stunner if the Fed didn't do that," said John Shin, U.S. economist at Lehman Brothers.
"The main debate is not about next week -- it's about September."
The uncertainty means Wall Street will be scrutinizing the Fed's statement, which in June said rate rises should be at a "measured" pace.
"If they keep in the 'measured' phrase and they don't make any significant comments, it could turn out to be, from the markets' perspective, a bit of a non-event," Shin added.
Rising interest rates are generally bad news for stocks because of the impact on companies' borrowing costs and consumer spending. A full 1 percent rate increase would translate into an additional $3.1 billion pre-tax expenditure by S&P 500 companies, according to Howard Silverblatt, market equity analyst at Standard & Poor's.
While rising interest rates are a dampener, investors are more worried by stubbornly high oil prices. U.S. crude futures hit historic peaks last week — rising as high as $44.77 a barrel before settling at $43.95. That leap near $45 took the price of U.S. crude to its highest in the 21 years that oil futures have been traded on the New York Mercantile Exchange (search).
Crude oil is a factor in almost every aspect of production and transportation of goods and services, and affects the profits of almost all companies. As a consequence, stocks have closely mirrored the change in crude oil futures, with the stock market falling when oil futures rise.
"You really can't make a run if you don't know where the price of oil is going and right now, it's at an all-time high," said Larry Wachtel, senior vice president and market analyst at Wachovia Securities.
"People are talking about $50 oil — I don't know where it will go, but what I do know is that every dollar up means the consumer isn't going to be spending money."
Geopolitical concerns are also likely to weigh on the market. This week, stocks wobbled when authorities issued the most specific warning yet of a possible Al Qaeda attack. New York, Washington and other money centers were put on "high" alert after the threat, aimed squarely at the heart of the capitalist system.
Earnings will take a back seat to economic and political news as the second-quarter reporting season winds down. But investors will be seeking further clues on the strength of consumer and business demand on Tuesday from Cisco's earnings and on Thursday, when Dell Inc. (DELL) and Wal-Mart report results.
"Cisco should be reporting solid earnings, given the move by corporate America to increase capital spending," said Joseph Zock, president of Capital Management Associates.
"Dell is probably one quarter away from a more positive earnings announcement because they tend to be helped by the back-to-school rush. And Wal-Mart will be important — it will be a better indication of what the broad-based consumer is doing with his or her money."
However, analysts are skeptical about whether earnings can help pull the market out of its malaise.
"From what we've seen so far, earnings have not been a catalyst to help the market. If anything, earnings have been a mixed bag," said Peter Boockvar, equity strategist at Miller Tabak & Co.
"The focus again will be on the economic data, since the debate is getting heated on which way the economy is going."