updated 8/6/2006 3:31:03 PM ET 2006-08-06T19:31:03

Some very smart people on Wall Street spent Friday proclaiming that the Federal Reserve would not raise interest rates Tuesday. Words like "case closed" and "the pause that refreshes" were found in reports and sound bites from economists, market strategists and chief investment officers.

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So why does it seem like stocks are primed to move lower, not higher?

Stocks fell modestly Friday although the Labor Department's monthly jobs reports showed a slowdown in labor growth that analysts and market economists said would keep the Fed from raising rates. Fewer new jobs would mean less consumer demand, which would keep prices in check and hold off inflation, robbing the Fed of a reason to raise rates.

There's two possible answers for Friday's decline. One is that there could be nervousness that the Fed could still hike rates. Investors often forget that while the Fed is primarily concerned with combating inflation and shoring up the dollar against other currencies. If economic growth is stalled in the process, so be it.

Second, even if the Fed doesn't raise rates, the economy is still slowing. And while that may be good for the stock market's short-term prospects, it means lower profits for companies in the long run.

The confusion over rates and what the Fed's actions could mean kept stocks mixed for the week. The Dow Jones industrial average rose 0.18 percent, the Standard & Poor's 500 index edged 0.06 percent higher, and the Nasdaq composite index dropped 0.43 percent.

The Fed's decision on interest rates will likely be the top economic story and market mover of the week, and the week's other economic data will be viewed with an eye toward its impact on rates.

The nation's trade deficit, subject of a Commerce Department report scheduled for Thursday, is expected to have risen to $64.5 billion in June from $63.8 billion in May. A deepening deficit can affect the value of the dollar overseas, which the Fed watches in setting interest rate policy.

On Friday, July's retail sales report from the Commerce Department could be good news for the retail sector. Overall sales are expected to rise 0.6 percent, compared to a 0.1 percent decline in June. With auto sales removed, July sales are projected to climb 0.5 percent, compared to a 0.3 percent rise the month before.

The market's preoccupation with the Fed has generally overshadowed a strong earnings season, but once the Fed's decision is made, there will be some notable companies reporting results this week.

After Tuesday's session, Cisco Systems Inc. reports its earnings, and is expected to earn 25 cents per share, in line with last year's results. The networking company's stock stumbled with the rest of the market over the past few months, and is off 21 percent from its March 30 high of $22, closing Friday at $17.24.

Investors will look to the Walt Disney Co.'s results for more evidence of the continuing turnaround under new Chief Executive Bob Iger. Disney shares have gained 30 percent since hitting a 52-week low of $22.98 on Oct. 20. Disney is expected to earn 44 cents per share, 2 cents per share better than a year ago. It closed Friday at $29.90.

A number of retailers are expected to post earnings this week, including Federated Department Stores Inc., J.C. Penney Co. and Kohl's Inc. But investors will look to Target Corp.'s earnings Thursday morning for a stronger overall read on consumer spending. Target is expected to earn 69 cents per share for the quarter, up from 61 cents per share last year. The company's stock has dropped 20 percent from its 52-week high of $59.29 on Nov. 11, and closed Friday at $47.22.

The Fed's decision on interest rates is expected to come out at 2:15 p.m. Eastern time Tuesday. The markets can be exceptionally volatile in the first half-hour after the announcement, with stocks moving practically in time with the statement being read over cable television. Stocks generally settle on a direction after that, however.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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