NEW YORK – With the Federal Reserve open to taking a break from nearly two years of raising interest rates, U.S. stock investors will watch next week for signs of tame economic growth that would make a pause all the more likely.
On Thursday, Fed Chairman Ben Bernanke set the stage by saying policymakers may pause in the current cycle of rate increases even if the risks to the Fed's objective of keeping inflation under control are not entirely balanced. The Fed has raised rates 15 times since June 2004.
So investors may be heartened by the slightest signs of moderation in growth.
Next week's calendar is loaded with key economic indicators, beginning Monday with the March reading on the core personal consumption expenditure price index, one of the Fed's favorite inflation gauges, and wrapping up with Friday's report on April nonfarm payrolls.
The March core PCE index, which excludes food and energy, is forecast to rise 0.2 percent, compared with a gain of 0.1 percent in February, according to economists polled by Reuters.
Monday's agenda includes the Institute for Supply Management's report on its manufacturing index for April, forecast to dip to 55 from 55.2 in March.
"We'll be looking specifically at the ISM number for a clue as to how strong the economy really is," said Gordon Fowler Jr., chief investment officer of The Glenmede Trust Co. "A strong number is going to be bad for the bond market and how the equity market reacts depends on whether they view the situation as the glass being half full — or half empty."
Tuesday brings April automobile sales, with car figures forecast to inch up slightly, while truck sales are expected to dip.
Wednesday's reports include data on factory orders and the ISM's index on the service sector. Economists in the Reuters poll expect a 3.5 percent gain in March factory orders, compared with the previous month's gain of 0.2 percent. The ISM's non-manufacturing, or service, index in April is forecast to slip to 59.2 from 60.5 in March.
The bulk of retailers will report April same-store sales on Thursday. Data on productivity and unit labor costs in the first quarter also will be released Thursday.
Betting on Jobs
Among the most important reports will be Friday's data on nonfarm payrolls, the unemployment rate and average hourly earnings.
"If unit labor costs are tame and unemployment comes in 'in line,' then 'the-Fed-is-pausing' camp gets a lot of credence," said John Forelli, senior vice president at Independence Investment in Boston.
"My guess is that some of the numbers won't come in so friendly. Manufacturing could come in strong and shake people up and an unemployment rate a little less than expected could make people a little nervous."
Economists polled by Reuters forecast that U.S. nonfarm payrolls added 200,000 jobs in April, compared with 211,000 in March. The unemployment rate is seen steady at 4.7 percent. Average hourly earnings are expected to increase 0.3 percent, compared with a gain of 0.2 percent in the previous month.
Health Care on the Hot Seat
The bulk of first-quarter earnings have already been disclosed, with Wall Street analysts agreeing most companies defied expectations of a slowdown. But some sectors still have several key components set to reveal their results next week.
Energy's integrated heavyweights reported this week, but smaller producers like Williams Cos. Inc. and Kerr-McGee Corp. will post results on Thursday.
Quarterly scorecards from health insurers Humana Inc.
and Cigna Corp. will be under scrutiny next week following competitor Aetna's disappointing earnings, which drove its shares down more than 20 percent on Thursday.
"I think those two will be watched. They'll be looking out for the medical loss ratio, because that's what hurt Aetna," Forelli said. "Health care is the one sector that's poised for rebound if those earnings reports come out more favorably."
Investors will get a broad snapshot of the consumer sector with companies set to report earnings next week. Dow component Procter & Gamble Co. , the owner of brands like Crest, Pampers and Tide; Whole Foods Market Inc. , the top U.S. organic food retailer, and cosmetics maker Estee Lauder Cos. Inc. are just some of the household names on tap.
One industry likely to disappoint is poultry. Tyson Foods Inc. , the No. 1 U.S. meat processor, which reports Monday, announced preliminary results last week that showed a much wider-than-expected quarterly loss. Tyson also cut its full-year outlook due to the bird flu crisis overseas. Pilgrim's Pride Corp. , the No. 2 U.S. poultry producer, will report Wednesday. Russia, the top importer, revoked import licenses for poultry.
Dow Hits Six-Year High
The Dow Jones industrial average hit a succession of six-year highs last week. On Friday, the Dow climbed as high as 11,417.66 — another six-year high. The Dow could touch another peak if blue-chip Verizon Communications Inc. , set to report earnings Tuesday, beats forecasts.
At Friday's closing bell, though, the Dow ended down 15.37 points, or 0.14 percent, at 11,367.14. The Standard & Poor's 500 index was up just 0.89 of a point, or 0.07 percent, at 1,310.61. The Nasdaq Composite Index fell 22.38 points, or 0.95 percent, to close at 2,322.57.
For the week, the Dow rose 0.17 percent, while the S&P 500 dipped 0.05 percent and the Nasdaq fell 0.87 percent.
While the performance may look lackluster, investors cannot afford to be asleep at the wheel.
"You're starting to see some rotation in the market even though the indexes aren't going anywhere," said Sam Rahman, portfolio manager at Baring Asset Management Inc. "There's a tug of war between the cyclical stocks like commodities, energy and manufacturers versus the stable growth stocks like banks, technology, health care and consumer goods. How that shakes out will determine where the stock market goes."