The markets may well sit quietly ahead of the Fed's rate decision Tuesday, but after that be prepared for more rock and roll.
The Fed is widely expected to trim a quarter point from its 4.50 percent target Fed funds rate, but some in the markets are hoping for a half point cut. The Fed is also seen trimming the 5 percent discount rate by a quarter point or more.
Stocks are spring-loaded, awaiting that next Fed move, and could no doubt rally heartily, if briefly, should the bigger cut be announced.
Zero to 50
Mesirow Financial chief economist Diane Swonk expects the Fed to cut a half point both from the Fed funds rate and the discount rate though a month ago she did not think any cut was necessary. But the economic picture has changed.
"They've got the concern of weak growth. We have the credit markets still in turmoil. They need conviction over consensus," she said.
She says Fed Vice chairman Donald Kohn's comments in late November were a watershed moment that showed the Fed was on high alert and aware of the risk from the credit crunch and housing slump to the markets and economy. In the Fed's comment Tuesday, she expects "they will still come out fairly balanced on risks because there are going to be people (on the Fed) who are worried about inflation ... and the staff is going to come up with a new zero (growth) forecast on the current quarter."
"Their chances of getting another cut if we get a reacceleration of growth is minimal so they might as well go 50 (a half point) now."
Swonk says the Fed could overshoot, by cutting too much and possibly running the risk of inflation. "I think (former Fed Chairman Alan) Greenspan had that one right. You go (cut) and look like you're going to go until you're done," she said.
Rock 'n Roll
After the rate news, traders expect a return to the type of volatility that drove the stock market in the past week. (with the exception of Friday's rather muted session when the Dow gained just 5.69 points) The next significant event for stocks after Tuesday will be brokerage industry earnings reports, which begin Thursday with Lehman's fourth quarter. Goldman Sachs and Morgan Stanley report the following week.
"We've had pretty elevated volatility since August, and I don't see that changing, particularly as you go into the year end" said Bill Nichols, senior managing director, equities trading at Bear Stearns.
Brokerage reports will be watched very closely for signs of more subprime related credit write downs or warnings of more. Citigroup, one of the more downtrodden financial stocks, may get a lift in the coming week if it names a new CEO.
There are reports the Citi board is meeting early in the week to discuss CEO candidates, and the Wall Street Journal says that inside candidate Vikram Pandit may be named to the job.
The S&P 500 financial sector fell 1 percent Friday, but rose 0.53 percent for the week. The group is down 15.6 percent year-to-date though some banks have suffered far more. Winners last week were the materials sector, up 3.44 percent and energy, up 3.5 percent.
The Dow moved up 253 points in the past week, or 1.9 percent, to 13,625, on top of a big gain the week earlier. The Dow is now up 9.3 percent year-to-date. The Nasdaq rose 45 in the past week or 1.7 percent to 2706, and the S&P 500 was up 23 or 1.6 percent at 1504. Nasdaq is up 12 percent for the year, and S&P 500 is up 6.1 percent
BlackRock Vice Chairman Robert Doll, who is his firm's chief investment officer, says he expects stocks to stay in the current range of 1450 to 1550 on the S&P 500, and 13,000 to 14,000 on the Dow until it is clear whether the economy can dodge a recession. If the economy falls into recession, stocks break down below those levels. If recession is avoided, he sees stocks moving ahead.
"Until we can answer that question, we're going to be in that trading range. Our view is we're not going to have a recession so our view is we'll be emerging from that trading range," he said, but added "At the moment, there's no way to have an answer to that question."
Some days, it's going to feel like it's safe to put your toe in the water, and other days it's going to be "we're not out of the woods yet," he said.
Doll says investors shouldn't worry about this period if they are long term m holders of stocks. "if that's the case, don't worry about volatility," he said.
Stock sectors he likes include health care, technology and energy. Doll says he expects the Fed to cut a quarter point and possibly as much as half tot he discount rate, the rate the Fed charges banks on short term loans.
He also said the Bush Administration's mortgage plan is a positive. The plan, which has drawn criticism, would freeze rates for some subprime borrowers for five years. "The plan in particular has its good and bad points, as all of them do. My view is that for us to get out of this mess and for the credit markets to operate more normally, two things have to happen. The Fed needed and continues to need to lower rates. That's necessary, but not sufficient. Secondly, we need some band aids from the government, the industry, the mortgage industry, etc. I would argue what we got (Thursday) was a band-aid," he said.
Besides the Fed meeting, there is some important economic data expected in the coming week. Inflation data, in the form of both producer and consumer prices, are reported Thursday and Friday, respectively. Another big item is retail sales for November, released Thursday at 8:30 a.m.
Other data to watch includes the NFIB small business survey for November, released Tuesday at 7:30 a.m. Wholesale inventories are issued Tuesday at 10 a.m. On Wednesday, international trade data is reported, as well as the import price index. Energy inventory data is also released Wednesday. Jobless claims are reported Thursday. On Friday, industrial production and capacity utilization are also released.
Lehman is the week's earnings news highlight, but there are a few other big earnings this coming week. H&R Block is expected to report a loss on Monday after the bell. Kroger reports Tuesday. Novell reports Wednesday, and Ciena and Costco report Thursday.
Oil prices continued in a downhill slide this past week, losing 0.5 percent to $88.28 per barrel. Oil was down 2.2 percent Friday. Gasoline rose 1.7 percent for the week to $2.2690 per gallon. Heating oil fell 0.4 percent to $2.5047 per gallon. Natural gas prices fell 2 percent.
The dollar lost 0.2 percent against the euro for the week and was up 0.5 percent against the yen. In the Treasury market, the flight-to-quality trade is subsiding. The 10-year saw its yield rise back above 4 percent, reaching 4.119 percent Friday afternoon. The two-year is now yielding 3.117 percent.
Bush Administration officials head to China this week for the U.S.-China Joint Commission on Commerce and Trade and to continue the economic dialogue. Treasury Secretary Hank Paulson, New York City Mayor Michael Bloomberg and NYSE Chairman Duncan Niderauer attend the grand opening of the New York Stock Exchange's Beijing office Tuesday, and Wal-mart will open its 100th Chinese store this week.
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