After two winning weeks on Wall Street, investors find out Tuesday if their wish for an interest rate cut — the driver behind the rally — will be granted.
Federal Reserve officials in recent weeks have indicated a willingness to cut rates further, so it’s almost a foregone conclusion that the target federal funds rate is headed lower. The Fed has already dropped rates twice since the credit markets froze up over the summer due to surging mortgage defaults, and the only point of contention in the market seems to be the size of the next cut.
But there are three more weeks left in this rocky year, so investors aren’t sighing with relief just yet. Wall Street remains uncertain if the Fed will keep lowering rates into the new year; at the central bank’s last meeting on Oct. 31, policy makers said “the upside risks to inflation roughly balance the downside risks to growth.”
Fed Chairman Ben Bernanke and others appear to have shifted their stance in light of recent market turbulence, but investors want to see it in writing. Furthermore, many are skeptical that rate cuts are enough to bring demand back into the worrisome areas of the credit markets, which has been seeing securities downgraded on practically a daily basis.
Wall Street has posted robust gains recently as investors grew more confident in the Fed’s openness to loosening its policy again. They have also been relieved that some credit-loss estimates for banks have been milder than feared.
“The market has sort of changed its paradigm — it’s expecting the worst. So when it doesn’t get the worst, it rallies,” said Brandon Thomas, chief investment officer for Envestnet Asset management.
The Dow Jones industrial average has risen more than 640 points over the last two weeks, a rally that has brought the blue-chip index to less than 4 percent below the record close it reached Oct. 9.
Last week, the Dow ended 1.90 percent higher, the Standard & Poor’s 500 index finished 1.59 percent, and the Nasdaq composite index ended up 1.70 percent.
Whether the Fed lowers rates in 2008 will depend not only on how the financial and housing industries weather ongoing mortgage problems, but also on inflation. Any higher-than-anticipated readings for November from the Labor Department’s producer price index and consumer price index — scheduled to be released Thursday and Friday, respectively — could worry investors.
And with two weeks left until Christmas to shop, Wall Street wants to see a fiscally fit consumer raring to spend. The Commerce Department’s retail sales report for November will be an important economic snapshot, especially after last week’s mixed sales data from individual retailers.
There are not many earnings scheduled for this week, but there are a few that the market will be watching closely. Costco Wholesale Corp.’s quarterly results could give investors a clearer sense of how the average consumer is faring, while Lehman Brothers Holdings Inc.’s report — the first fourth-quarter report from the investment banking industry — will offer some insight into how tough the credit markets have been for banks over the last few months.
Analysts are expecting Lehman to post a profit decline and Costco to report a profit rise.
Wall Street will also be monitoring data Monday on pending home sales in October and a Wednesday report on the October trade deficit, which could have implications for the tumbling dollar.