NEW YORK – This week could be the moment of truth for stocks. Investors will look to see if the Federal Reserve delivers on the expectation that it is poised to pause after more than two years of raising interest rates.
Friday's payrolls data — considered to be a key factor in the Fed's rate-setting decision — showed weaker-than-expected July job growth, and analysts said that could be enough to prompt the Fed to halt its rates increases when it meets on Tuesday.
After the employment report, U.S. interest-rate futures showed less than a 15 percent perceived chance the Fed will raise rates by 25 basis points on Tuesday, compared with a chance of about 43 percent before.
Investors have been trying to guess when the central bank might pause in its rate-raising campaign, and have been anticipating for months that the end of the tightening cycle is near. The Fed has raised interest rates 17 consecutive times since June 2004, driving its benchmark fed funds rate for overnight bank loans up to 5.25 percent from 1 percent, the lowest it had been in almost four decades, when the tightening cycle began.
"Right now, 'Topic A' is the Fed, and we're looking at jockeying for position ahead of the Fed meeting and announcement on Tuesday," said Fred Dickson, market strategist and director of retail research atD.A. Davidson & Co. in Lake Oswego, Oregon.
Barry Hyman, equity market strategist at EKN Financial Services Inc., in New York, said Friday's headlines about slower job growth in July gave stock investors the facts they needed to back up weeks and months of hoping for relief from the Fed's relentless string of rate rises.
"The Street believes the Fed's out of the way," Hyman said. "We can now go on with the process of healing the economy without higher interest rates to come. It's a start. "The equity players like that. The bond market certainly does."
The yield on the benchmark 10-year U.S. Treasury note
fell to 4.90 percent, its lowest since early April, after the July jobs report came out on Friday. Before the report, the 10-year note's yield was at 4.96 percent, the same as it was late on Thursday.
EARNINGS SLOW TO A TRICKLE
The earnings agenda is expected to be light, with the second-quarter reporting period near an end. Among top companies expected to report results are El Paso Corp.(EP), a natural gas producer and pipeline company; Cisco Systems Inc.(CSCO), the Nasdaq stalwart and network equipment maker, and American International Group Inc.(AIG), the world's largest insurer. All three companies are part of the S&P 500. AIG also is a Dow component.
Most forecasts show profit growth for S&P 500 companies of at least 11 percent for the second quarter from the year-ago period, which would mean roughly four years of double-digit gains.
Reuters Estimates' latest forecast puts earnings growth at 12 percent, up from a forecast of 11.7 percent a week ago, senior market analyst Ashwani Kaul said.
FRIDAY'S EARLY RALLY FADES
Rising interest rates are a negative for stocks because they mean higher borrowing costs for corporations and consumers. Worries that U.S. economic growth has slowed too fast also have kept investors on edge.
Stocks rallied early Friday on the jobs report, then reversed course to end down slightly as concerns about slowing growth offset optimism about the possible pause in rate rises.
Before the opening bell, the Labor Department reported U.S. employers added 113,000 workers to their payrolls in July. Economists were expecting a gain of 142,000.
The Dow Jones industrial average slipped 2.24 points, or 0.02 percent, to end Friday's session at 11,240.35. The Standard & Poor's 500 Index was down 0.91 of a point, or 0.07 percent, to finish at 1,279.36. The Nasdaq Composite Index was down 7.29 points, or 0.35 percent, to close at 2,085.05.
For the past week, the Dow rose 0.18 percent, the Nasdaq fell 0.43 percent and the S&P 500 inched up 0.07 percent.
"Our sense is the market will remain right where it is now until that (Fed) announcement comes out, so the beginning of the week is going to be kind of quiet, with no significant price movement," Dickson said.
WAR AND TRADE
While the Fed's meeting is expected to take center stage this week, investors also will keep a close eye on the Middle East as Israel continued to fight Lebanese Hizbollah guerrillas. The conflict has caused concerns about oil supply disruptions in the region.
British Prime Minister Tony Blair delayed the start of his holiday Friday to work on a United Nations cease-fire for Lebanon. U.S. Assistant Secretary of State David Welch was scheduled to visit Beirut over the weekend for talks with Lebanese Prime Minister Fouad Siniora on ways to end the war.
"Investors are hanging on to the most recent news to see if the situation stabilizes or escalates into something more serious," Dickson said.
U.S. crude oil for September delivery fell 70 cents to settle Friday at $74.76 a barrel on the New York Mercantile Exchange, after Tropical Storm Chris got downgraded to a depression. For the week, the price of NYMEX September crude was up 2.1 percent.
While analysts agree the Fed meeting will be the main event this week, there will be a few other numbers that will merit attention. A preliminary second-quarter report on U.S. productivity and unit labor costs is expected Tuesday, the day of the Fed's meeting, while the Commerce Department's report on the U.S. international trade deficit for June is scheduled for Thursday. July retail sales are due Friday.
The Fed could "make a statement that still leaves people a little uncertain," so "people will still be scrutinizing indicators," said Peter Dunay, chief investment strategist at Leeb Index Trader in New York.
Unit labor costs will attract the Fed's attention, and by extension, Wall Street's, because they are regarded as a way to keep tabs on whether rising wages may be contributing to inflationary pressures. Economists surveyed by Reuters believe that unit labor costs rose at an annual rate of 3.5 percent in the second quarter, while they see productivity increasing 0.9 percent.
The U.S. international trade deficit is expected to have widened to $64.4 billion in June from $63.84 billion in May, according to the Reuters poll of economists.
For the month of July, U.S. retail sales are expected to rise 0.8 percent, the Reuters poll showed. Excluding autos, July retail sales are forecast to rise 0.5 percent.