NEW YORK – U.S. stocks may gain and trading volume may rebound as Wall Street goes back to work after the Labor Day holiday, and as investors bet the Federal Reserve will keep rates unchanged at its next meeting.
The last week of August was marked by a blitz of economic data that showed a drop in consumer confidence, a gradual slowdown in the pace of growth in the manufacturing sector and a moderate increase in jobs. But at the same time, oil prices fell below $70 a barrel and an upward revision of second-quarter GDP figures encouraged some investors.
Inflation was mild. Average hourly earnings rose just 0.1 percent in August, below expectations.
"Now that everybody is coming back, we are going to see the real impact on the stock markets of all the data that has been released in the past couple of days," said Alexander Paris, an economist and market analyst for Barrington Research, in Chicago. "Some of the reports showed a drop in consumer confidence, while other indicators came in better than expected. Bottom line is, the Fed has no reason to raise rates in September and that may help stocks."
The Nasdaq and the S&P 500 wrapped up August with their best monthly performance since January, while the Dow posted its biggest monthly gain since April.
On Friday, U.S. stocks rallied after the August employment data increased optimism that the economy was still strong enough that companies could sustain profitability.
For the year so far, the Dow is up 7 percent and the S&P 500 is up 5 percent, while the Nasdaq is down 0.6 percent.
In the week ahead, highlights on the economic front will include readings on second-quarter U.S. productivity, the services sector in August, wholesale inventories in July and a the Federal Reserve's compilation of regional economic conditions, known as the Beige Book.
"It will be an abbreviated week, with traders returning from vacation and the focus will be on the economic data," said Peter Cardillo, chief market analyst and chief strategist at SW Bach & Co. in New York.
U.S. financial markets will be closed Monday for the Labor Day holiday. Trading will resume Tuesday.
The Dreaded 'R' Word
Hanging over the market is a debate among strategists and economists over whether the United States is heading for a gradual economic slowdown, or a full-fledged recession, especially after reports of weakness in the housing sector.
On Friday, data from the National Association of Realtors, showed a record drop in pending home sales. Still, the report followed the release Wednesday of the government's second estimate of U.S. gross domestic product for the April through June quarter. That second estimate revised GDP growth upward to an annual rate of 2.9 percent, slightly faster than first reported. It was deemed a positive factor for stocks as better growth could lead to improved profits.
"The Street is divided between the group of people who expect a 'soft landing' and the group who expects a 'hard landing' for the economy," said Paris at Barrington Research. "And the divide is one of the reasons why stocks have been trading in a narrow range."
Labor Costs and ISM's Services Index
More clues about the state of the economy and the outlook for inflation will come Wednesday, with a revision of productivity and unit labor costs for the second quarter.
According to economists polled by Reuters, productivity probably gained 1.5 percent in the period, up from the previously reported rise of 1.1 percent. Unit labor costs are expected to have risen 3.8 percent, the Reuters poll showed, below the initial report of a 4.2 percent gain. The report is due at 8:30 a.m.
"Productivity is one of those reports that allows the Fed to give inflation a little more room," said Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics in New York. "In other words, we are not seeing wage pressure."
On Wednesday, the Institute for Supply Management will release its services industry index for August at 10 a.m. The ISM non-manufacturing index is expected to rise to 55.0 in August from 54.8 in July.
The Fed's Beige Book of economic conditions also will be released Wednesday. It's due at 2 p.m.
Wrapping up the week, wholesale inventories for July may show an increase of 0.6 percent in July, according to the Reuters poll. The report is due on Thursday at 10 a.m.
Oil prices also will be on Wall Street's watch list amid a very light earnings calendar. U.S. crude futures for October delivery fell $1.07 to settle Friday at $69.19 per barrel on the New York Mercantile Exchange.
"Traditionally September is a weak month, but with oil hovering around present levels and no geopolitical concerns, the month may be a little friendlier than usual, " said Cardillo at SW Bach.
National Semiconductor Corp. (NSD) is the only S&P 500 company set to report earnings next week — on Thursday.
Among the few corporate highlights, Intel Corp. (INTC), the world's largest microchip maker and a Dow component, may announce as early as Tuesday that it may cut up to 10 percent of its work force, according to News.com, a technology news Web site run by CNET Networks.