NEW YORK – Stock investors will search for any sign from the Federal Reserve (search) next week that an end to its interest-rate-hike cycle is near, which could lift the stock market over a speed bump.
But if the Fed indicates that rising rates are here to stay for the rest of the year, that could put a damper on Wall Street's mood after the S&P 500's and Nasdaq's recent climb to 4-year highs.
The Federal Open Market Committee (search) will meet Tuesday, when Wall Street forecasts that it will raise the fed funds rate (search) another 25 basis points -- as it has done at each of the past nine straight meetings. Such a move would push the fed funds rate, or the rate for overnight bank loans, up to 3.5 percent Tuesday.
Stock investors, however, may react more to the Fed's commentary on the economy and the direction of interest-rate policy rather than on the actual rate increase.
Financial markets see the fed funds rate hitting 4 percent by year end. But Friday's robust U.S. July payrolls report prompted some observers to bet it could move even higher.
The Labor Department (search) reported nonfarm payrolls rose by a higher-than-expected 207,000 in July, compared with a revised increase of 166,000 in June. The forecast was for July growth of 183,000 jobs, according to economists polled by Reuters.
Average hourly wages also increased in July, raising concerns about inflation and giving the Fed more ammunition to justify its campaign to keep raising borrowing costs, some economists said.
Friday's strong July jobs data pushed the Dow Jones industrial average down 52.07 points, or 0.49 percent, to end at 10,558.03. The Standard & Poor's 500 Index fell 9.44 points, or 0.76 percent, to finish at 1,226.42. The technology-laced Nasdaq Composite Index closed down 13.41 points, or down 0.61 percent, at 2,177.91.
For the week, stocks fell, with the Dow down 0.8 percent, the S&P 500 off 0.6 percent, and the Nasdaq off 0.3 percent.
"The market's between a rock and a hard place," said Ralph Bloch, senior vice president at Raymond James Associates in Reston, Virginia. "The jobs data comes out better than expected. I'd always thought that was good for the economy, but the 'fundamentalists' are talking about how that's going to get the Fed to keep raising rates. It's just nuts."
Higher interest rates are seen as negative for stocks because they raise business costs and eat into consumers' discretionary spending.
With the bulk of second-quarter corporate earnings already reported, stock investors will watch to see if the remaining companies can keep up the trend that analysts have characterized as largely better-than-expected results.
Monday, investors will also look out for results from Auto parts supplier Delphi Corp. (DPH), which said on Friday said it is in talks with former parent General Motors Corp. (GM) and its main unions about a restructuring of its unprofitable operations. Delphi also said it would draw $1.5 billion from a $1.8 billion revolving credit facility.
Shares of Delphi fell 14.2 percent to close Friday at $4.96 on the New York Stock Exchange.
Wednesday, Federated Department Stores Inc. (FD), which posted disappointing same-store sales figures for July, will report its results for the second quarter.
Several major economic indicators may also lend a direction to stocks next week.
Wednesday, the Treasury Department will release the July federal budget deficit, expected to have narrowed to $57 billion from $69.2 billion a year earlier.
"What is likely to happen as a result of strength in the economy, I think government revenue will continue to exceed expectations, which means the budget deficit will come down faster," said Stanley Nabi, vice chairman at Silvercrest Asset Management Group in New York. "That is a marginal plus."
Thursday the Commerce Department (search) in expected to report U.S. retail sales rose 2.2 percent in July, compared with 1.7 percent in the previous month, according to economists polled by Reuters.
This week, stocks fell Thursday after a majority of retailers reported July same-store sales that fell short of expectations.
In the week ahead, Friday's agenda includes a report from the Commerce Department on the June U.S. international trade gap. Analysts expect the U.S. trade deficit widened to $57.3 billion in June from about $55.4 billion in May, which was the narrowest shortfall in six months.
"We improved in May, but it looked too good, so we may have some payback and that could move the market," said Kurt Karl, senior U.S. economist at Swiss Re in New York. "The possibility of a record deficit would be a shock. It's a negative risk for the equity market."