Wall Street expects a two-day Federal Reserve meeting this week to end with another cut in interest rates as financial firms struggle with losses tied to subprime mortgages and related securities.
Trading in November fed funds futures show a 25-basis- point cut in the benchmark rate to 4.5 percent is fully priced in, with only a small chance that there will be a bigger cut to 4.25 percent.
Should the Fed decide to leave rates unchanged, clearly there will be disappointed investors when the announcement comes on Wednesday, which happens to be Halloween.
At the last meeting, on September 18, the Fed cut the fed funds rate 50 basis points to 4.75 percent and lowered the discount rate by 50 basis points to 5.25 percent. It was a bigger cut than the market expected, and stock prices rocketed higher with the Dow industrials gaining 2.5 percent.
Michael Cuggino, president and portfolio manager of the Permanent Portfolio Funds in San Francisco, said the Fed's decision next week could go either way -- a 25-basis-point cut -- or no cut at all.
He said some argue that an October cut would provide insurance that the economy will avoid recession. But others say standing pat gives the Fed time to analyze the effects of the September cut.
When the announcement does come, he said, What they say is going to be as important as what action they take.
Although the Fed meeting looms large, Wall Street also has to contend with corporate earnings, which are not as robust as in previous quarters, oil prices at record highs and the crucial monthly jobs report at the end of the week.
At Friday's close, stocks wrapped up the week with gains.
For the past week, the Dow Jones industrial average rose 2.11 percent, the Standard & Poor's 500 Index added 2.31 percent and the Nasdaq Composite Index gained 2.90 percent.
The market's gains came even as the subprime credit crisis continued to play out among financial firms. Merrill Lynch & Co. Inc. shocked Wall Street with an $8.4 billion write-down, which resulted in the biggest quarterly loss in the firm's history.
For the year so far, the blue-chip Dow average is up 10.78 percent, while the S&P 500 is up 8.25 percent and the Nasdaq is up 16.10 percent.
CONFIDENCE MAY SLIP MORE
On the data front, Tuesday brings the Conference Board's survey on consumer confidence for October. According to a Reuters poll of economists, the median forecast anticipates a drop in the index of consumer confidence to 99.0 in October from 99.8 in September. The September reading was not only worse than expected, but it left the index at its lowest level in nearly two years.
We would anticipate it would be a little soft, William Dwyer, chief investment officer of MTB Investment Advisors in Baltimore said, referring to the consumer confidence data.
Dwyer noted that oil is approaching $95 per barrel at the same time there are concerns about a possible recession, which makes people worry about employment.
On Wednesday, in addition to the Fed news, there is a string of economic data, including the first estimate of gross domestic product for the third quarter. The median forecast is that the economy grew at an annual rate of 3.0 percent, which would be slower than the 3.8 percent in the second quarter.
Thursday's data includes a report on personal income and spending. The consensus forecast is that personal income rose 0.4 percent in September, a bit more than the 0.3 percent rise in August.
Consumer spending is expected to show a similar 0.4 percent rise, less than the 0.6 percent increase in August.
Also due on Thursday is the latest index of national factory activity from the Institute for Supply Management. The forecast is for an October reading of 51.5, which would be down from 52.0 in September. If the forecast is correct, it would be the fourth consecutive monthly decline.
Automakers report domestic car and truck sales for October on Thursday. Economists expect slower sales than in September.
OCTOBER JOBS AND EARNINGS GALORE
Friday brings the monthly payroll data, one of the most closely watched numbers on Wall Street. The consensus view is that 80,000 jobs were added in October, fewer than September's increase of 110,000. The jobless rate is expected to remain unchanged at 4.7 percent.
Friday's data includes a report on factory orders in September. A decline of 0.5 percent is forecast.
The corporate earnings season continues with about 100 Standard & Poor's 500 companies scheduled to report quarterly results and hundreds more from mid-sized and smaller companies.
Among those reporting are Kellogg Co on Monday, Procter & Gamble Co and Goodyear Tire & Rubber Co on Tuesday, life insurer MetLife Inc on Wednesday, Exxon Mobil Corp on Thursday and International Paper Co on Friday.
According to Reuters Estimates, of 299 companies that have reported results for the third calendar quarter of 2007, 196, or 65.6 percent, beat consensus forecasts, while 67 companies, or 22.4 percent, missed. Another 36 companies, or 12 percent were in line. However when all the results for the 299 companies are combined, there is an average shortfall of 0.32 percent compared with the consensus.
A year ago, based on results from 490 companies, the average result was 5.8 percent better than the consensus.
Drew Kanaly, chairman of Kanaly Trust Co. in Houston, expects energy stocks to be actively traded next week when several companies in addition to Exxon Mobil, are expected to release results.
As for stock performance, he expects energy and technology stocks to be market leaders while financial stocks are just going to continue to get beaten up.
(Additional reporting by Jennifer Coogan in New York and Ros Krasny in Chicago)
(Polling by Bangalore Polling unit)