Wall Street knows the Federal Reserve is all but certain to raise interest rates at Tuesday’s Fed policy meeting. The bigger question, and one that may not get an answer this week, is when will the Fed stop?
The Fed’s Open Market Committee is expected to lift the nation’s benchmark interest rate by a quarter percentage point to 3.5 percent, the 10th such quarter-point hike since last summer. Normally, such a modest rate hike would be considered bullish, since it shows the Fed’s confidence in the state of the economy.
Wall Street, however, is increasingly worried that the Fed will go too far. Done properly, rate hikes manage economic growth and inflation, keeping both in balance. Raising rates too fast could make capital too expensive for companies, crimping growth.
For now, the Fed’s rate policy seems to have captured that balance. Inflation remains low, corporate earnings are strong and, according to the government’s data, the economy is growing at a steady pace. Nonetheless, investors will be watching the Fed’s policy statement closely. If Fed Chairman Alan Greenspan and his fellow committee members see inflation as a problem, rates will continue climbing — and stocks could see a drop-off this week.
Last week, disappointing retail sales, a persistent surge in oil prices and inflation concerns led to the markets’ first down week since June 24. For the week, the Dow Jones industrial average lost 0.78 percent, the Standard & Poor’s 500 index fell 0.63 percent and the Nasdaq composite dropped 0.32 percent.
Rise in retail activity
Wall Street had a glimpse of July’s retail sales when the nation’s biggest stores last week released disappointing results, as hot summer weather and a spike in gas prices dampened customer traffic. When the Department of Commerce reports its preliminary number Thursday, economists are expecting the nation’s retail activity to increase by 1 percent versus a gain of 1.7 percent in June.
But much of the growth will have come from last month’s surging auto sales, boosted by deep discounting at the top U.S. car companies that catapulted revenues following months of lackluster demand. Excluding vehicle sales, retail sales growth is forecast to be unchanged at 0.7 percent.
The University of Michigan’s consumer sentiment index, a widely watched measure of consumer confidence, is expected to edge higher to 96.9 percent from 96.5 percent last month. The preliminary index for August will be reported after the start of trading Friday.
Also Friday, the Commerce department is scheduled to report the nation’s trade deficit for June, which economists predict will rise to $57.1 billion from $55.3 billion in May.
The technology sector, heavily sold off last week after the Nasdaq reached a new four-year high, will be in focus in the week ahead as two major tech companies report earnings.
Shares of Dell Inc. have jumped sharply after two of the last three earnings reports, based on the strength of those earnings as well as the company’s status as a barometer for both the retail and corporate computer markets. The company, expected to issue its results Thursday afternoon, is expected to post earnings of 38 cents per share, up from 31 cents in the year-ago quarter. Since dropping in April and May along with the technology sector, falling to $34.80 on April 29, the stock has risen 14 percent to close Friday at $39.67.
Tech sector bellwether
Cisco Systems Inc. has also made gains since its spring lows, climbing 13.5 percent from its 52-week low of $17.01 on April 18 to close Friday at $19.30. Analysts are anticipating the network equipment maker, considered another indicator of the tech sector’s health, will post a bigger quarterly profit Tuesday afternoon. Cisco is expected to earn 24 cents per share for the quarter, compared with 21 cents a year ago.
Among other companies reporting earnings this week, retailer Target Corp. is projected to continue nearly four years of profit growth when it reports quarterly results Thursday morning. Although Target’s July sales came in slightly below analysts’ estimates, its earnings are still expected to rise to 59 cents per share from 48 cents per share last year. But while the summer rally lifted Target’s stock to a 52-week high of $60 on July 20, shares have slipped 7.6 percent since then, closing Friday at $55.47.
Other notable companies reporting during the week include Delphi Corp. on Monday morning, MCI Inc. before Tuesday’s session and News Corp. on Wednesday afternoon.
The Fed’s Open Market Committee is expected to issue its statement on interest rates at 2:15 p.m. EDT Tuesday. Trading is often volatile for the first 20 minutes after the announcement, after which the market tends to settle on a direction.