Although Wall Street now sees higher interest rates as a foregone conclusion, stocks are likely to continue drifting until there are clearer signals about the economy’s direction in the coming months.
Since late last year, investors have been increasingly uncertain about the Federal Reserve’s plan to prevent the economy from overheating and fight inflation by gently nudging short-term lending rates higher.
But while economic growth recently has shown signs of moderating, soaring commodity prices still pose a threat to prices elsewhere in the economy. Core consumer prices — excluding volatile food and energy costs — grew more than analysts expected in both April and May.
Fed Chairman Ben Bernanke has made it clear the Fed will keep lifting rates even at the risk of stunting growth. That’s prompted the market to worry that the central bank could overshoot its target and trigger an economic slide.
For now, it’s a game of wait and see. The Fed is almost guaranteed to raise the nation’s key interest rate by a quarter-percentage point to 5.25 percent at its two-day meeting Wednesday and Thursday, and Wall Street is strongly considering the possibility that another increase could be coming in August.
And many analysts expect the Fed to remain hawkish on inflation in its accompanying statement on the economy’s health, which will draw attention to this week’s reports on gross domestic product growth and personal consumption.
“In fact, I’m not looking for any change at all in this statement,” said Michael Gregory, a senior economist at BMO Nesbitt Burns. Gregory said he expects the Fed might address the further acceleration of inflationary pressures that occurred in recent weeks, but noted that the coming rate hikes could also have a largely psychological impact on investors.
“I think the Fed considers its tightening at this point as an optical device to control inflation expectations,” he said. “Hopefully the Fed’s move on interest rates and talking tough will contain inflation.”
With few datapoints to offer clues about the economy, Wall Street continued its pattern of wildly erratic trading last week. The major indexes finished the week lower, with the Dow Jones industrial average falling 0.23 percent, the Standard & Poor’s 500 index down 0.56 percent and the Nasdaq composite index losing 0.4 percent.
Economic data
The final revision to first-quarter GDP growth Thursday headlines this week’s economic news. Last month, the Commerce Department adjusted GDP’s annual growth rate to 5.3 percent from an advance reading of 4.8 percent; this time, the pace of expansion is expected to be revised to 5.6 percent. The GDP’s inflation component is seen unchanged at 3.3 percent.
Both June consumer confidence readings this week are projected to weaken. On Tuesday, the Conference Board’s confidence measure is forecast to slip 0.2 point to 103. Then on Friday, the University of Michigan’s consumer-sentiment index is estimated at 59, down from 61.5 in the prior month.
Personal income and spending data from the Commerce Department on Friday will give a further read on the consumer picture. May income is expected to rise 0.2 percent after adding 0.5 percent last month; spending is seen growing 0.4 percent, versus a 0.6 percent increase in April.
Signals about the economy’s health from housing and unemployment data could also affect the market. The Commerce Department on Tuesday reports May new home sales, which are forecast to drop by 48,000 to 1.15 million. On Thursday, The Labor Department issues its weekly update on first-time applications for jobless benefits.
Earnings
Walgreen Co. has rallied throughout Wall Street’s recent selloff, as investors moved funds into safer sectors such as health care and consumer staples. The drugstore chain posts its third-quarter results Monday morning, and its earnings are expected to grow to 44 cents per share from 40 cents the year before. Shares have gained 9.6 percent from a May low of $39.80 to finish Friday at $43.61.
Sportswear maker Nike Inc. releases its earnings Tuesday afternoon, and analysts predict its fourth-quarter profit will rise to $1.40 per share from $1.30 per share a year ago. Nike’s stock also recovered during the May decline; shares ended Friday at $84.36, up 8.2 percent from a low of $77.98.
Accenture Ltd. reports third-quarter results after the closing bell Thursday. The management and technology consulting firm’s earnings are seen edging up to 46 cents per share from 44 cents last year. Accenture shares have suffered since hitting an all-time high of $32.94 in late February, sliding 17.7 percent to close at $27.10 on Friday.
Events
The Federal Open Market Committee releases its decision on interest rates Thursday at 2:15 p.m. Eastern Time. Since another rate hike is widely expected, investors will be primarily focused on the accompanying statement on the economy’s health. Stocks typically fluctuate for 15 minutes before picking a direction for the rest of the session.