The Fed in the week ahead is expected to officially signal the long-anticipated shift away from one of its most controversial easy money policies, even as new data is likely to show the economy grew at a more sluggish pace in the first quarter.
"In every economic cycle, people treat the beginning of the tightening cycle or tightening theme as monumental. The beginning of the tightening cycle does not historically portend the immediate end of the bull market."
The two-day Fed meeting will also be groundbreaking in that Fed Chairman Ben Bernanke holds a 2:15 p.m. ET press briefing Wednesday afternoon, following the 12:30 p.m. release of the Fed statement, in its first ever quarterly briefing.
"This is a big deal. I think it's pretty meaningful, and it will increase transparency and give the Fed, Bernanke in particular, more opportunity to explain the statement," said Ian Lyngen, senior Treasury strategist at CRT Capital.
The coming week also holds a significant amount of data, including Thursday's release of first quarter GDP, which is expected to show a temporary softening of the economy to a growth rate of 2 percent or less.
There will also be another gusher of corporate earnings reports, from about one third of the S&P 500 companies, including ExxonMobil , Coca-Cola , Caterpillar , Norfolk Southern and Amazon.com . So far, about 75 percent of the companies reporting have beat earnings estimates.
Investors are also watching the dollar in the week ahead, as it hovers at a three-year low. Oil and other commodities continue to move higher, as the dollar slides, and stock traders are concerned higher energy prices could start to crimp consumer spending and hurt corporate profits.
The markets though are mostly focused on the Fed, and the belief that it will confirm the end to its quantitative easing program, which has been expected to be completed in June. The program has been credited for driving the dollar lower and commodities and stocks higher, since Bernanke first suggested it last August.
Pimco senior market strategist Tony Crescenzi said Bernanke's goals for his briefing would be to reassure the markets that the Fed is focused on price stability, at a time when inflation is edging higher. "The second purpose would be to control or limit collateral damage from an eventual change in monetary policy. In other words, when the Fed decides to reverse course, it needs to explain what it's doing because the reversal will be more complex than normal," said Crescenzi.
The briefing by Bernanke also comes after a parade of Fed officials in the last several weeks voiced their opinions on inflation and the Fed's exit strategies, with several pushing for an earlier move away from the quantitative easing program than planned. "The most savvy investors know that the members to listen to most are Bernanke, (New York Fed President William) Dudley, and (Fed vice chair Janet) Yellen, but the general public might be confused by what they hear, given the cavalcade of opinions that have come out from the various Fed officials, so this will help button it up, put a more uniform look on where the Fed stands on various issues," he said.
Even with the pending end of this particular program, under which the Fed is buying $600 billion in Treasury securities, the Fed is far from returning to the policies of more normal times. The end of the Fed's zero interest rate policy could still be many months, or even a year away, and still unclear is whether the Fed will continue to buy Treasury securities with the proceeds of roll downs in its mortgage portfolio.
"In every economic cycle, people treat the beginning of the tightening cycle or tightening theme as monumental," said Richard Bernstein of Richard Bernstein Advisors. "The beginning of the tightening cycle does not historically portend the immediate end of the bull market."
As the Fed meets this week, there are a number of key economic reports, including first quarter GDP and durable goods. Economists see the first quarter's weakness as temporary, easily blamed on weather, weaker net exports and other factors.
"The economy has its ups and downs, and there's no black swan event here," said Crescenzi. "It wasn't anything unusual, just part of the normal variability in a business cycle...second quarter will be 3 percent plus. First quarter in the 2 percent area makes sense but think about the supportive elements in the employment story and retail sales...The weather probably played a role, but rather than make excuses, it's probably best to look at the underlying factors that would support growth, like personal income. It's up 5.1 percent year-over-year. That's a normal level."
Bernstein agreed a sign of strength was found in that March retail sales report, which came in higher than expected at 0.6 percent, minus autos and gasoline. "In other words, everybody is saying gasoline is going to kill the consumer. I'm as worried about that as everyone else. But this number that came out on retail sales for March shows the consumer is doing better than people think. Maybe we haven't reached the magic number (for gas prices)," he said.
"It's not so much the earnings reports ..."
Stocks in the four-day pre-Easter holiday week ended with solid gains as better-than-expected earnings news drove global stock markets higher. The week started on a sour note, as Standard and Poor's reduced the outlook on the United States to negative and threatened to cut the AAA sovereign credit rating if the budget deficit is not under control in two years.
That helped send the dollar lower, and by the end of the week, the dollar index was at a three-year low. The dollar fell nearly a percent against the euro, which was at 1.4558 and it was at 2011 lows against a group of currencies. At the same time, West Texas Intermediate crude oil rose 1.9 percent on the Nymex to $112.29 per barrel, and gold rose to a record $1503.20, up 1.2 percent for the week.
The Dow in the past week jumped 14 percent to 12,505, its biggest weekly gain since March 25 and its highest close since June 5, 2008. The S&P 500 rose 1.3 percent to 1337, its best close since mid-February. Treasurys saw buyers on the week, pushing the yield on the 10-year to 3.398 percent.
Bernstein said he remains bullish on stocks, a view he's held since early summer, 2009. "I continue to believe earnings will be reasonably strong, if not stronger. I think they'll surprise and I think the economy continues to recover, and people don't want to admit it," he said.
Wells Capital Management chief investment strategist James Paulsen also sees earnings momentum continuing. "I was a little worried about the earnings season because the GDP figures came down," he said, but he's been encouraged by the so far strong showing.
"It's not so much the earnings reports. It's the CEO forecasts that seem stronger about the future. It just seems more confident," he said.
Goldman Sachs late Thursday released a report noting that earnings surprises have averaged 11 percent this quarter, and analysts have raised EPS estimates for all four quarters. Energy companies profits, boosted by rising oil, is a key reason. "Bottom up full-year 2011 EPS estimate now stands at almost $99, above our $96 top-down forecast," Goldman analysts noted.
The coming week's data includes some housing, with new homes sales Monday; the S&P/Case-Shiller home price index Tuesday and pending home sales Thursday. Consumer confidence is Tuesday, and consumer sentiment is Friday. The durable goods report for March is on Wednesday, and weekly jobless claims are Thursday. Personal income and the employment cost index are Friday, as is the Chicago purchasing managers report.
The Treasury holds three auctions in the coming week, for $99 billion in 2-year, 5-year and 7-year notes. The 5-year auction will be earlier than normal Wednesday, at 11:30 a.m. ET because of the early Fed announcement at 12:30 p.m.
There are about 180 companies, or 34 percent of the S&P 500 reporting this week. Monday's reports include Cooper Industries, Kimberly-Clark, Express Scripts, Netflix and Reinsurance Group of America.
On Tuesday, Coca-Cola, Ford , 3M , UBS, UPS, Canon, Coach, Cummins, Delta Air Lines, Illinois Tool Works, USAir, U.S. Steel, Valero, and Arch Coal report before the bell. Amazon.com, Broadcom, Becton Dickinson, Altera, Nalco Holdings, DreamWorks and Stanley Black and Decker report after the bell.
Boeing , BP , ConocoPhillips, General Dynamics, Corning, Northrop Grumman, Praxair, CIT Group, Dr. Pepper Snapple, Whirlpool, Southern Co, Moody's and Baker Hughes report Wednesday morning. EBay, Starbucks, Allstate, Baidu and Norfolk Southern report after Wednesday's closing bell.
Thursday's reports include Exxon Mobil, AstraZeneca, Deutsche Bank, Pepsico , Procter and Gamble , Royal Dutch Shell, Bristol-Myers, Aetna, Apache, Cameron, Celgene, CME Group, Thomson Reuters, Colgate-Palmolive, Dow Chemical, Medco Health, Raytheon, Occidental Petroleum, Time Warner Cable, Viacom and Sprint Nextel. Microsoft, Motorola Mobility, Eastman Chemical and KLA-Tencor report after the bell.
Friday's earnings include Caterpillar, Chevron , Merck , DR Horton, Weyerhaeuser, Amerigroup and Newell Rubbermaid.
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