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Investors hope Fed will ease off on rates

On Tuesday, the Federal Reserve Board issues its latest statement on the economy and is expected to raise the nation’s benchmark interest rate. Again. That prospect is likely to keep the market in check this week.
/ Source: The Associated Press

Wall Street is spooked, and it has nothing to do with Halloween.

The volatility of the past few weeks, with stocks making big gains and suffering big losses — sometimes in back-to-back sessions — shows a market bogged down by uncertainty and treating each earnings report or piece of economic data as a portent, mostly dire, of things to come.

Hopefully, a bit more clarity will arise Tuesday after the Federal Reserve Board issues its latest statement on the economy and is expected to raise the nation’s benchmark interest rate.

Clarity, of course, may not be entirely good for the market. If it appears that the Fed believes inflation will be an ongoing concern, then rate hikes will likely continue unabated. That, most likely, will keep stocks lower as investors fear rising rates will combine with lower consumer spending to halt economic growth.

If the Fed signals that it is nearing the end of its rate hike regime — considered unlikely, unfortunately — that could be enough to launch stocks into a year-end rally like the “Santa Claus” rallies of the last four years.

That’s not to say that Wall Street’s year-end rally is doomed if the Fed doesn’t let up on interest rates. Friday’s gross domestic product figures showed very strong economic growth in the third quarter, which means that while the economy is expected to slow down, it’s starting from a higher rate of growth than previously thought.

Will Santa show up?
If Wall Street sees some positive employment data, a rise in consumer spending and/or a drop in energy prices, Santa might still arrive in time for Wall Street’s holiday season.

The likelihood of continued rate hikes and prospects for the usual year-end rally kept stocks volatile all week, with two triple-digit gains and a triple-digit loss. For the week, the Dow Jones industrials ended 1.84 percent higher, the Standard & Poor’s 500 gained 1.6 percent, and the Nasdaq Composite Index rose 0.37 percent.

Job growth is a big key to the future of the economy: the more people in jobs making money, the more money people can spend to fuel economic growth. With consumer spending looking weak heading into the holidays, Wall Street will look closely at the Labor Department’s monthly job creation report, due out Friday.

Economists expect 125,000 new jobs to have been created in October, an improvement from a loss of 35,000 jobs in September due to the disruptions caused by Hurricane Katrina. With disruptions from Katrina and fellow hurricanes Rita and Wilma still filtering through the economy, any gains in jobs will be considered a step forward.

Commerce personal-income report due
Investors will also look carefully at the Commerce Department’s report on personal incomes and spending, due Monday. Incomes are expected to rise 0.4 percent in September after slipping 0.1 percent in August, while personal spending is expected to climb 0.5 percent after a 0.5 percent drop the previous month.

Finally, the Institute for Supply Management will release its manufacturing and services indexes this week. On Tuesday, the ISM manufacturing index is expected to come in at 57, down from 59.4 in September, while Thursday’s ISM services index for October is expected to increase to 57 from 55.3 the previous month.

Valero Energy Corp. is expected to continue the oil industry’s stunning profit growth when it releases its quarterly earnings Monday morning. The company is expected to earn $4.23 per share, up sharply from $1.57 per share in the third quarter of 2004. Valero’s stock has more than doubled from its 52-week low of $40.30 on Nov. 9, 2004, closing Friday at $99.50.

P&G, Time Warner set to report
Procter & Gamble Co., fresh off its acquisition of Gillette Co., will report its earnings Tuesday morning. P&G stock has traded in a $9 range over the past year, and is down 6.1 percent from its 52-week high of $59.56 on Oct. 3. The company is expected to earn 75 cents per share for the quarter, up slightly from 73 cents per share last year. P&G closed Friday at $55.92.

On Wednesday, media conglomerate Time Warner Inc. is expected to report its earnings before the bell. The company is forecast to earn 18 cents per share, up from 15 cents per share in the year-ago quarter. Time Warner’s stock has traded narrowly this year and is off 10.8 percent from its 52-week high of $19.90 on Dec. 15, 2004, closing Friday at $17.75.

The Federal Reserve customarily publicizes its decision on interest rates at 2:15 p.m. EDT, increasing volatility on the market for at least a half-hour or more afterward as analysts and traders digest the Fed’s latest policy statement.

With the start of November, retailers are expected to start releasing their sales reports for October. Major gains or losses from the largest retailers, such as Wal-Mart Stores Inc., can weigh on the markets.