NEW YORK – Federal Reserve Chairman Alan Greenspan's (search) take on the U.S. economy and the dollar's movement in response to the latest trade deficit data will set the tone for the U.S. stock market next week.
Most of the drama will come toward the end of the week, with the Fed chairman set to testify Thursday about the outlook for the economy before the Joint Economic Committee, a congressional panel of U.S. senators and representatives.
Friday, the U.S. international trade deficit figures for April will be released by the Commerce Department (search). The forecast calls for the trade deficit to swell in April after contracting in March. The dollar's reaction will be watched closely for any signs of weakness.
Oil inventory data will grab Wall Street's attention Wednesday following this week's jump in U.S. crude futures prices above $55 a barrel. And a mid-quarter update from Intel Corp. (INTC), the world's dominant computer-chip maker, will get scrutiny after Thursday's closing bell.
But the Fed chairman will command center stage. His words may have more impact than usual after the stir created this week by Richard Fisher, the president of the Federal Reserve Bank of Dallas.
Fisher used a baseball analogy to describe the Fed's almost year-long campaign of interest-rate hikes, a comparison that markets took to mean the central bank's rate-rise game would end soon.
"Greenspan's testimony will be important because this week we heard Fisher from the Dallas Fed suggest that the Fed is in its final inning here in its tightening cycle, and it will be very interesting to see if we hear something different from the chairman," said Jeff Kleintop, chief investment strategist at PNC Advisors.
Fisher is a voting member of the Fed's rate-setting Federal Open Market Committee (search), so his comments carried particular weight in the markets. The FOMC's next meeting is set for June 29-30.
Last June, the Fed began its current cycle of raising interest rates by bumping up its benchmark fed funds rate from a historic low of 1 percent to 1.25 percent. That was the first of eight consecutive rate increases that pushed the fed funds rate up to 3 percent.
Wednesday, U.S. stock and bond markets rallied on Fisher's remarks indicating that the Fed may stop raising interest rates this summer.
But the euphoria proved to be short lived. Friday, stocks dropped after the government reported that May nonfarm payrolls grew at the slowest pace in 21 months.
A Reuters poll of the 22 banks that deal directly with the Fed in buying and selling U.S. Treasury debt showed that all expect the Fed to raise interest rates in June and August -- by a quarter percentage point each time. That would push the fed funds rate up to 3.5 percent.
For the week, stocks fell. The Dow Jones industrial average (search) ended down 0.77 percent, the Standard & Poor's 500 index dipped 0.23 percent and the Nasdaq Composite Index dropped 0.21 percent.
The international trade deficit is expected to widen slightly to $58 billion in April from $54.99 billion in March, according to economists polled by Reuters. The Commerce Department will release the trade gap data at 8:30 a.m. Friday.
"I think we will see a significant widening in the trade deficit and that will start putting some pressure on the dollar," Kleintop said.
Oil prices, which ended the week above $55 a barrel, will be watched closely Wednesday at 10:30 a.m. when the government reports the latest weekly oil inventory.
"Oil continues to be an overhang on the market. At this level, we have a hard time believing that the market is going to rally," said Tim Ghriskey, chief investment officer of Solaris Asset Management.
"But crude prices are extremely volatile. Only if oil prices fall below $50 a barrel does it provide a backdrop where the market can rally," Ghriskey added.
Thursday, tech bellwether Intel's mid-quarter report will give investors clues about the health of the semiconductor industry.
"One of the most important things is to get a sense of where the margins are and what demand looks like," PNC Advisors' Kleintop said. "Intel isn't sitting on a lot of inventory, but other chip makers are and so to get a feel of what the demand picture looks like from Intel could point to the inventory position across the industry.
"If inventory levels are high, it leads to slow production and weak pricing," Kleintop said.
Meanwhile, the Russell Investment Group (search) is set to release a list of probable additions and deletions to its equity indexes Friday. So investors can expect a spike in volatililty and volume in the days leading up to the changes.