WALL ST WEEKAHEAD - Markets to take cue from the Fed
By Elizabeth Smith
NEW YORK, March 19 (Reuters) - Wall Street's troops this week can do little more than stand in formation until the Federal Reserve makes its move on Tuesday.
If the central bank's Federal Open Market Committee hikes borrowing costs by an expected 25 basis points, conventional wisdom portends a muted market reaction. A sharper increase could drive Wall Street's foot soldiers to retrench amid fears that rates will erode corporate profits.
``If they do more than 25 basis points, that will be a serious blow to the stock market, and probably the bond market as well,' said Pierre Ellis, a senior economist at Primark Decision Economics in New York. ``They (Fed governors) have made a point in recent weeks to tout the virtues of gradualism. Twenty-five basis points is gradual. Fifty points would be a big jolt.'
Another piece of economic data that could jar investors on the day of FOMC meeting is the U.S. current account deficit figure that is to be released Tuesday morning. It is expected to total $25.5 billion. A higher number could fluster investors and color the Fed's decision making that day, Ellis said.
Also, a conservative decision on the part of the Fed to boost rates by 25 basis points isn't likely to result in a stock market relief rally, Ellis said. That happened on Thursday after a benign producer price index for February signaled that inflationary pressures weren't mounting.
The news helped trigger a stunning rally of ``old economy' stocks such as airlines, banks and huge industrial companies long neglected by tech-crazed investors. The Dow Jones Industrial Average on Thursday rocketed up 499 points, its largest ever one-day point gain. The Nasdaq on Thursday and Friday failed to recoup losses it had sustained earlier in the week and closed down five percent for the week.
Another reason industrial stocks were awash in investor cash late last week was a drop in crude oil prices. Bearish sentiment took hold in the oil futures market, with expectations that OPEC would boost output after supply curbs expire at the end of March.
April futures for crude on Friday settled at $30.91, down 18 cents. OPEC is said to be ready to gear up production by 1.5 million barrels per day when it meets in Vienna on March 27.
The head-spinning volatility that whacked Nasdaq stocks and juiced the Dow last week isn't expected to fade from the scene, industry veterans say. For example, the market will have little time to digest the Fed's actions before it must turn its attention to the jobless claims number due out on Thursday.
``We have to look forward to the Fed and possible preannouncements as we head into the last weeks of the quarter,' said Francis Gannon, a U.S. equities portfolio manager for SunAmerica Asset Management. ``A lot of companies may be admitting to problems. In addition, we have the employment numbers next week. So the volatility is far from over and near-term, there are some big hurdles for this market.'
On the earnings front, financial stocks are set to wow investors, with reports that investment banks will announce bumper first-quarter profits this week. Shares in Lehman Brothers (NYSE:LEH - news), Morgan Stanley Dean Witter (NYSE:MWD - news) and Goldman Sachs (NYSE:GS - news) rose Friday in anticipation.
Also, 3Com Corp (NasdaqNM:COMS - news), which recently spun-off its lucrative electronic organizer unit, Palm Inc (NasdaqNM:PALM - news), is set to report earnings and discuss its business strategy.
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