Fed watchers are set to take over on Wall Street next week as a Federal Open Market Committee meeting could give stock investors more clues on the outlook for interest rates.
Financial markets are now fully expecting the 17th consecutive increase in U.S. interest rates on Thursday, after a flurry of speeches from Fed officials and data showing core inflation picked up in May.
But they also will give a laser-like focus to the Federal Open Market Committee's statement in search of information about when the Fed might take a break in its cycle of interest rate hikes, which began in late June 2004.
I don't think anyone is going to focus on anything but the Fed, said Milton Ezrati, senior economic strategist at Lord Abbett & Co in Jersey City, New Jersey. The Fed speakers have effectively warned us that there will be another rate hike and they have also set the stage for us to start thinking about inflation expectations.
For the week, stocks fell as investors were jittery in anticipation of the Fed meeting. The Dow Jones industrial average finished the week down 0.23 percent, while the Standard & Poor's 500 Index fell 0.56 percent and the Nasdaq Composite Index dropped 0.40 percent.
On Friday, fed fund futures showed investors believe the Federal Open Market Committee will raise rates again at its August meeting, as well as at the June meeting.
Wall Street expects the fed funds rate for overnight bank loans, now at 5 percent, will be raised to 5.25 percent next week. Fed fund futures also indicated there's a strong chance that the benchmark fed funds rate will be bumped up to 5.5 percent at the FOMC's August meeting.
THE GUESSING GAME
But investors have low expectations that the Fed will provide any information that could help boost the market next week.
I think we'll get transparency from the Fed, but I don't think we'll get a lot of clarity, said Jeff Kleintop, chief investment strategist at PNC Advisors in Philadelphia.
Since the beginning of this year, investors have been betting the Fed was about to halt its cycle of interest-rate increases, but the U.S. central bank has kept them guessing.
Investors might want the Fed to provide a road map for future rate increases, but analysts said that was unlikely.
I don't think the Fed really knows where they're going, and people are going to watch the economic numbers, said Todd Leone, head of listed trading at Cowen & Co. in New York, referring to the Fed officials' statements that suggest the Fed will remain data-dependent.
FULL PLATE OF ECONOMIC DATA
In fact, investors will get extra helpings of economic data next week, with some earnings reports also in the mix.
Economists are anticipating that reports on new home sales and existing home sales in May, due on Monday and Tuesday, respectively, will show that housing sector activity slowed from the previous month.
New home sales are expected to decline to an annual pace of 1.15 million units in May from 1.198 million units in April, according to economists polled by Reuters. They believe existing home sales will slip to a rate of 6.64 million units in May from 6.76 million in April.
On the consumer front, the Conference Board's confidence index for June will be released on Tuesday, with the Reuters poll pegging it at 103.5, nearly even with the previous reading of 103.2. The University of Michigan's final consumer sentiment number for June is due on Friday, with the forecast calling for a rise to 82.5 from 79.1 previously.
Personal income and consumption figures for May also are due on Friday. The Reuters poll of economists forecast that personal income went up 0.2 percent in May, while personal consumption rose 0.4 percent, and the core PCE price index, an inflation gauge favored by the Fed, increased 0.2 percent.
Earnings reports from drugstore group Walgreen Co., food company ConAgra Foods Inc. and shoemaker Nike Inc. should shed some light on whether the U.S. consumer is spending at a healthy clip or keeping a tighter hold on the purse strings.
First-quarter gross domestic product data, scheduled for release on Thursday, is expected to be revised upward to show the U.S. economy expanded at an annual pace of 5.5 percent.
Traders said the GDP data is old news as far as the market is concerned, and investors are more likely to focus on any earnings pre-announcements next week that would give a clue as to how companies will report second-quarter results in July.
The Fed will occupy center stage throughout next week as anxiety about inflation and slower economic growth roiled markets in recent weeks.
Volume is likely to be light, with traders taking positions on Monday and holding them until they get more information from the Fed, Lord Abbett's Ezrati said.
There is not much momentum, Ezrati said. Everyone will take their positions and then hold their breath.
The main event for Wall Street will come on Thursday, around 2:15 p.m. EDT (1815 GMT) , when the Fed's rate announcement and policy statement are expected.
Next week, the quarter ends. And as things stand now, it is shaping up to be the worst quarter for stocks since the third quarter of 2002 when worries about corporate earnings and accounting scandals pushed stocks to their worst performance since 1987.
So far, for the quarter, the Dow is down 1.1 percent, the S&P 500 is down 3.9 percent, and the Nasdaq is off 9.3 percent. (Wall St Week Ahead runs weekly. Questions or comments on this column can be e-mailed to: emily.chasan(at)reuters.com)