Investors Eye Fed Amid Rate-Increase Worries

Investors are likely to remain slightly nervous next week with another rate increase expected from the Federal Reserve (search) and the crucial April non-farm payrolls report on tap.

The Federal Open Market Committee (search) will meet on Tuesday.

Wall Street's top investment banks expect the FOMC will bump short-term U.S. interest rates up another 25 basis points, which would bring the fed funds rate up to 3.00 percent from 2.75 percent, according to a Reuters poll of 20 primary dealers in U.S. government bonds.

"The Fed announcement (on interest rates) will actually be a no-brainer. The key is whether they are going to drop the word 'measured,"' said Sandy Lincoln, managing director and chief portfolio strategist at Wayne Hummer Asset Management (search).

In its March statement, the FOMC once again used the term "measured" to describe its preferred pace of interest-rate increases. That sent a signal to financial markets that future rate hikes would be done in 25-basis-point increments, just as the Fed has done since it began tightening credit last June.

Any shift in language will reflect "on both sustained growth and contained inflation," banking group HSBC said in a note to clients.

All 20 dealers polled by Reuters expect the FOMC to approve a quarter-percentage-point rate increase on Tuesday, while 19 of the 20 dealers expect another 25-basis-point rate hike at the FOMC's June 30 meeting.

On Friday, the U.S. government will release the monthly employment report for April. The forecast calls for April non-farm payrolls to rise by 170,000 jobs, according to economists polled by Reuters. In March, only 110,000 jobs were created.

The April U.S. unemployment rate is expected to hold steady at 5.2 percent.

Any disappointment in the week's economic numbers could trigger a sell-off in the stock market, analysts and traders said.

"It (the market) could go a lot uglier very fast," said Peter Schiff, president of Euro Pacific Capital.

Cheaper Oil Offers Some Relief

At Friday's close, stocks were mixed for the week. The blue-chip Dow Jones industrial average rose 0.3 percent during the week, while the broad Standard & Poor's 500 Index advanced 0.4 percent, and the tech-driven Nasdaq Composite Index slipped 0.6 percent.

The closing bell marked the end of a volatile month for the stock market. All three stock indexes hit fresh 2005 lows during April and ended the month with losses. The Dow fell 3 percent during April, while the S&P 500 dropped 2 percent and the Nasdaq lost 4 percent.

Sliding oil prices on Friday touched off a late-day rally, pushing the Dow average up 122.14 points, or 1.21 percent, to close at 10,192.51. NYMEX June crude futures fell $2.05 on Friday to settle at $49.72, a 10-week low.

If oil prices continue their downhill run, that could soothe some investor jitters over the economy. Lower oil prices raise the prospects of improvement in corporate profits.

ISM, More Earnings and Car Sales

Other key economic data also will get scrutiny throughout the week as investors search for signs of whether the U.S economy is heading toward a slowdown, accompanied by an inflationary trend.

The Institute for Supply Management, or ISM, is due to come out with its April manufacturing index on Monday. The average forecast is 55 in April, down from 55.2 percent in March. HSBC cited high energy prices as one of the reasons for this soft trend.

On Wednesday, the ISM will release its non-manufacturing index that measures activity in the U.S. services sector. The forecast calls for a dip to 61.0 in April from 63.1 in March, according to economists polled by Reuters.

The earnings machine also will keep cranking out the numbers, keeping investors and analysts on their toes for any projections of slower growth in profits or revenues for the year's second half.

Among major companies in the S&P 500 scheduled to report results on Monday are: cosmetics giant Avon Products Inc. (AVP); Tyson Foods Inc. (TSN), the largest U.S. meat processor, and Electronic Data Systems Corp., the second-largest U.S. technology services provider.

On Tuesday, corporate report cards are expected from Tyco International Ltd., which makes products ranging from duct tape to fire-protection systems; Qwest Communications International Inc., the fourth-largest U.S. local telephone company; Marsh & McLennan Cos. Inc., the world's largest insurance broker, and MetLife Inc., the largest U.S. life insurer.

Auto makers will report U.S. car and truck sales for April on Tuesday.

"The market is potentially at a point of inflection," said Jeffrey Saut, chief investment strategist at Raymond James Financial.

Saut said if economic data does not indicate sustained growth, the market could continue its bearish trend.

Indeed, U.S. investors have reasons to feel glum. On Friday, economic reports showed high gasoline prices and sluggish wages were hurting consumer sentiment.

Adding to the feel-bad factor was a slide in consumer and business morale across Europe with French unemployment rising and central bankers in Scandinavia and Switzerland expressing fears over high oil prices and poor job creation.