Wall Street to focus on any hints from Fed
There are 6 1/2 trading sessions until the Federal Reserve says for certain whether it’s lowering interest rates.
Investors have been hoping for weeks for a rate cut by the Federal Reserve, which meets Sept. 18. But now, after last week’s disagreeable job report, Wall Street is more nervous than ever over the possibility that even the expected quarter-point rate cut next week may not be enough to save the economy from slipping into recession and stocks from sliding into negative territory for the year.
On Friday, investors got a shock when the Labor Department reported a drop in August payrolls, the first monthly decline in four years. The report was seen as evidence that problems with the sluggish housing market and tightening credit have, indeed, become a real threat to growth.
Consumer spending accounts for about 70% of the economy, and when consumers don’t have jobs, they tighten their purse strings and miss their bill payments.
The Dow Jones industrial average ended the week 1.8% lower, the Standard & Poor’s 500 index fell 1.4% and the Nasdaq composite index dropped 1.2%.
This week, investors will be wrestling with predicting the Fed’s next move and deciding how drastic that next move should be.
There are worries that Wall Street has already priced in a quarter-point rate cut, so even if it gets one, it may not boost stocks. Some investors are hoping for a half-point rate cut, or even a rate cut before the Fed’s meeting -- a move that many analysts consider unlikely.
As of Friday, traders who bet on the Fed’s next move were not only pricing in a full chance of the central bank lowering rates Sept. 18, but also a full chance of the rate being a full point lower, at 4.25%, by December.
A rate cut, though widely anticipated, is not guaranteed. Bad economic news could cause more jitters for Wall Street this week, but also, any indication that the Fed might keep rates steady will most certainly trigger heavy selling.
The Federal Reserve has said for months that with the economy growing moderately, inflation is its primary concern. Since stocks tumbled in late July, the Fed has lowered the discount rate it charges banks, injected about $320 billion into the banking system through repurchase agreements, and said it was prepared to act as needed to keep the stock market’s plunge from damaging the economy. But it has stopped short of announcing a reduction in the benchmark federal funds rate.
Today, several Fed officials -- Atlanta Fed President Dennis Lockhart, San Francisco Fed President Janet Yellen, Dallas Fed President Richard Fisher and Fed Gov. Frederic Mishkin -- are scheduled to speak at various events around the country. Their comments will undoubtedly be closely parsed by Wall Street for clues about the economy’s health and the central bank’s upcoming decision.
Investors likewise will be poring over the economic data that will trickle in all week; Tuesday’s reading on the U.S. trade deficit will be a particularly closely watched report. But like last week, Friday is the big data day and should help investors gauge how American consumers and businesses are faring and how the Fed might act when it meets next week.
Despite all the negative feelings out there, economists anticipate Friday’s data will show that the average U.S. consumer isn’t caving under the weight of the slumping housing market. August retail sales are expected to have ticked up 0.2%, after July’s 0.3% increase, and the University of Michigan’s preliminary September consumer sentiment reading is forecast to show little change from August.
Analysts also predict that Friday’s data will show that businesses kept chugging along late this summer, albeit modestly. Industrial production is predicted to have increased 0.2% in August, after a 0.3% gain in July, and August capacity utilization is anticipated to register at 82%, about the same as in July.
Business inventories are expected to have risen 0.3% in July after rising 0.4% in June.
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At a glance
Federal Reserve reports on consumer credit for July.
Treasury bill auction.
Commerce Department reports on international trade for July.
Labor Department reports on weekly jobless benefit claims.
Treasury reports on federal budget for August.
Freddie Mac, the mortgage company, reports on mortgage rates.
Commerce Department reports on retail sales for August, current account for second quarter and business inventories for July.
Federal Reserve reports on industrial production for August.
United Auto Workers’ national contracts with the Detroit Three domestic automakers expire.
Sources: Times staff and wire reports