Wall Street investors left for Labor Day weekend pleased about the prospects of an interest rate cut, but they’re likely to come back wanting more evidence that rates are indeed about to come down.
The market has been in better spirits, for the most part, over the past two weeks than in midsummer, when fears that lending troubles would freeze up credit sent stocks tumbling. Although the Fed has injected cash into the banking system and lowered the discount rate — the rate it charges commercial banks for loans — Wall Street’s fears haven’t been completely assuaged.
The Dow Jones industrials and Standard & Poor’s 500 finished slightly lower in a week where it plunged and later recovered. The Nasdaq finished the week higher.
Fed Chairman Ben Bernanke has not come right out and declared that a rate cut will happen, but many investors believe he has telegraphed it by saying the central bank will “act as needed.” Traders who bet on the Fed’s next move are not only pricing in a 100 percent chance of a quarter-point rate cut at its next meeting on Sept. 18, but also are pricing in a 100 percent chance of similar move in October.
The Fed has not reduced the benchmark fed funds rate since 2003, when it declined from a low 1.25 percent to 1 percent. Starting in 2004, the central bank made gradual rate increases until the summer of 2006, when it began holding the benchmark rate at 5.25 percent — the highest it’s been since early 2001, but historically, fairly moderate.
Investors will be curious to see if the Bank of England and European Central Bank decide to lower rates Thursday. Rate cuts abroad could signal a similar move from the Fed.
Investors also want to know if the U.S. job market, which has been one of the more stable parts of the economy, is holding up. The Labor Department’s report comes out Friday. Economists surveyed by Thomson Financial predict that nonfarm payrolls rose in August, that the unemployment rate held steady at 4.6 percent, and that hourly earnings ticked up by 0.3 percent.
Friday’s jobs report is probably the most anticipated of the four-day week, but there will be some notable pieces of data coming in before then.
Wall Street will return to work Tuesday and read the Institute for Supply Management’s measure of U.S. manufacturing. It is expected to have weakened slightly in August compared to July.
On Wednesday, investors will examine the National Association of Realtors’ report on pending sales of existing homes, as well as the Fed’s Beige Book, which details economic conditions in various parts of the country.
Thursday will bring the ISM’s report on the service economy and data on U.S. productivity. Also Thursday, Wall Street will be listening to speeches from Fed officials Janet Yellen, Dennis Lockhart, Richard Fisher and William Poole for clues about interest rates.
With Wall Street between the second- and third-quarter earnings seasons, profit reports have taken a back seat to headlines about Fed policy, the economy, and loan losses.
But investors want to hear what Hovnanian Enterprises Inc. has to say Thursday in its fiscal third-quarter earnings release. The homebuilder, which recently reported a drop in quarterly home deliveries and received a ratings downgrade from Fitch Ratings, is expected to post a loss of 99 cents a share. It closed up 57 cents, or 5 percent, at $11.87 on Friday — at the low end of its 52-week range of $10.35 and $38.66.