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The Week Ahead: Fed to the Rescue?

Credit worries will continue to send shock waves through the stock market in the coming week, and investor focus will no doubt turn more to the activity of the Fed than dwell on some ordinarily important economic data.

Inflation data, retail sales, regional manufacturing surveys and earnings from retailers are on the calendar this week. But investors have become increasingly convinced the Fed will trim rates, and it is widely expected the Federal Reserve will continue to pump liquidity into the banking system Monday morning.

"The only data that matters is repos from the Fed. We're not at the point where we have the luxury to worry about what the economy is doing," says CNBC senior economic correspondent Steve Liesman. "We remain in a mode only to concern ourselves with what effect this credit crunch will have on the economy. It's possible that the market could find some solace in some of the numbers out there, but any such solace would be quickly overwhelmed by more credit market news."

The Dow ended the week 57 points higher at 13,239, or up 0.4%, a change that does not show any of the stomach churning highs and lows of the past week's markets. The Dow rose 475 points in the first three days of the week, before the big 387 point washout Thursday. Friday was volatile with huge swings, but the Dow closed down just 31 points. The S&P 500 finished the week up 20 points or 1.4% at 1453 and the Nasdaq was up 33 points or 1.3% for the week at 2544.

The Dow is up 6.2% for the year, while the S&P is up 2.5% year to date and the Nasdaq is up 5.4%. On Friday, the yield on the 10-year was 4.776% up from 4.68% the week earlier.

Perfect Storm

News last Thursday that BNP Paribas temporarily halted withdrawals from three funds just a week after the French bank said the funds were fine rattled markets globally. Paribas said it was unable to value its holdings and that U.S. subprime mortgage debt was a factor. A sudden demand for cash sent short-term rates spiking in Europe and the European Central Bank immediately stepped in to add liquidity. The Fed followed suit.

Like a group of worried doctors, central bankers from Asia to northern Europe injected funds (and confidence) into the markets to stem further infection from constricted credit markets and the U.S. subprime mortgage mess. "What they're targeting is banks' inability to lend to each other. They're targeting the lack of liquidity in the system," said Liesman.

Managing Editor Tyler Mathisen reminds us it was quite a different story last summer. "Almost a year ago to the day, I said the market was in a perfect calm. This week has been a perfect storm," said Mathisen.

The Fed could inject funds again on Monday morning, and investors will be watching what happens around the world as Asian markets open Sunday night. (You can watch the live action in Asia on CNBC.com Sunday starting at 6 p.m.).

Asian markets were hard hit Friday. Japan's Nikkei was down 2.4%, South Korea's Kospi was down 4.2%, and Hong Kong was down 2.99%. In Europe, the U.K. FTSE was down 3.7%, the French Cac was down 3.1% Friday, and the German Dax was down 1.5%.

Asian stocks will be watched closely to see if the stabilizing in the U.S. market Friday impacts trading Sunday night.

"There's no rest for the weary next week. Stocks are not the problem, but they are the clearest barometer out there of the problem," said Liesman. "The only risk asset out there that you want to own are stocks. If people will not own stocks then that's a sign they won't take risk assets on at any price."

Oil Slick

Oil fell $4.01 per barrel for the week, or 5.3% to $71.47. Gasoline was off 3.7% to $1.9548 per gallon.

Econorama

Some key data will be released in the coming week. Retail sales for July are due Monday. Inflation data in the form of producer prices is reported Tuesday and consumer prices are out Wednesday. The NFIB small business survey comes out Tuesday. Empire state manufacturing survey is reported Wednesday and the Philadelphia Fed survey is Thursday. Housing starts for July are also reported Thursday.

"Certain data is actually going to be important," says CNBC's Rick Santelli. "I think to understand how the economy is going to be affected with credit issues going forward, we have to know where its been and where it is."

Santelli said he will be watching retail sales most closely because it is an important gauge for the consumer. "I think retail sales is going to be very key. I think if retail sales starts to look iffy even before the effects of the last three weeks, that says something."

CNBC's Larry Kudlow says the consumer, well Main Street, is doing just fine.

"Main Street may bail out Wall Street," Kudlow said. "That is the Main Street economy: more people working earning income in very profitable businesses. Leveraging the global boom is the ultimate solution to the mortgage credit problem. By the way, I also say bravo to (Fed Chairman) Ben Bernanke."

Fed Move?

We at CNBC, and elsewhere, know Mad Money's Jim Cramer thinks the Fed should cut rates. But the idea of a rate cut is taking hold more broadly, and traders are increasingly betting a rate cut could come in September.

J.P. Morgan economist Bruce Kasman said in a note to clients Friday that it is more likely the Fed could cut. "Signs of a broadening deterioration in financial market conditions could force their hand," Kasman wrote, according to the Wall Street Journal.

CNBC's Dylan Ratigan says there is more of a chance the Fed could ease. "If we get more big hedge fund losses and the credit markets continue to seize up like they did this week, the Fed will have no choice," says Ratigan.

"Make no mistake, the Fed is a band-aid not a solution," said Ratigan. "It doesn't heal the wound. At the end of the day, until we have a real assessment of the credit markets, this will not stop. It's not that the Fed's (injection of funds) not welcome and useful. It's just that until the actual problem is solved, the problem will persist and we do not know what's at risk."

Vince Farrell, managing director at Scotsman Capital, has said it's better if the Fed doesn't have to move but he's maintained the Fed would act if it has to.

"I said I didn't think the Fed would cut, not without weak economic data. I didn't see enough weakness for the Fed to act. It still remains to be seen. I think the data will turn down and the Fed will act. They will not act without that," Farrell wrote to us Friday. "They don't want to be seen as bailing out speculators. Whether that's right or not, that's my read. They will continue to inject as long as the Fed Funds rate is above 5.25%." Farrell is a CNBC contributor.

For more on the debate about the Fed and what CNBC viewers think the Fed should do, check out the "Heat" on CNBC.com.

Black Box Danger

CNBC's David Faber in the past week reported that some selling in certain stocks, like the takeover names, appeared to be linked to selling by quant funds. He said that the model used by these funds to take advantage of market inefficiencies became "out of whack" and the funds suffered losses as a result. Quant funds rely on computer-driven trading.

That selling wave also caught the attention of Blackrock's Chief Investment Officer Robert Doll, who talked to Becky Quick on Squawk Box Friday.

"The forced selling of leveraged quant product is something we haven't witnessed to this degree before. It reminds me a little of portfolio insurance - selling begets selling and that's what we've seen here," said Doll.

Doll also commented a week ago that the current correction phase was about half way over. On Friday, he was more optimistic.

"I think we are closer to the bottom in this correction, meaning the correction is more than half over. I don't think this is a black hole we are heading into because economic fundamentals remain pretty good. Granted these episodes will dampen that to some degree but global growth remains strong," said Doll.

Earnings Central

The markets may be ignoring fundamentals right now but there are still a few big earnings reports coming up this week. Private equity firm Blackstone is out with its first quarterly earnings report as a public company on Monday. Deere reports Wednesday, and Hewlett-Packard reports Thursday.

Retailers begin their earnings reporting cycle, a sign the second quarter earnings season is drawing to a close. Wal-Mart, Home Depot and TJX report Tuesday. J.C. Penney, Nordstrom and Kohl's report Thursday.

Last Word

CNBC Managing Editor Tyler Mathisen gets the last word this week. But first, here's a shout out to allof the great pros that report on the markets for CNBC and help us figure out what is going on as it happens.

"To those of us at CNBC, three Fed injections of liquidity is the equivalent of three Lindsay Lohan segments in one day," says Mathisen.

Entertainment Tonight must be jealous.