Sun, Aug 06, 2006 - Page 10 News List

Eye on Fed as US markets flat

DIVIDED OPINION US markets stayed mostly unchanged as views were unusually mixed on whether the US central bank will continue its interest rate hikes on Tuesday


Wall Street's major indexes were little changed over the past week as investors steeled themselves for a Federal Reserve policy meeting this coming week.

Market opinion is unusually divided on whether the US central bank will continue hiking interest rates, or put them on hold for the first time in over two years at Tuesday's meeting.

In the week to Friday, the Dow Jones Industrial Average climbed a slight 0.2 percent to 11,240.35 while the technology-rich NASDAQ market closed down 0.4 percent on the week at 2,085.05.

The broad-market Standard and Poor's 500 added a slim 0.1 percent to 1,279.36.

Many investors seized on a tepid monthly job report on Friday as evidence that the Fed will put borrowing costs on hold, but other analysts remained resolute that the Fed will lift its key fed funds rate above 5.25 percent.

The Labor Department said US employers took on just 113,000 new workers in July, against Wall Street forecasts for 145,000 new positions.

The jobless rate ticked up to 4.8 percent from 4.6 percent in June, marking its first increase since November.

"Although it is a close call, we are looking for the Fed to follow the market's lead and pause on Tuesday," Lehman Brothers economist Ethan Harris said.

"However, we expect a tightening bias in the directive, consistent with our outlook for two more rate hikes before year-end," he said.

ABN AMRO economist Carl Tannenbaum, however, leant the other way.

"It is going to be an exceptionally tough call this time around. Our view is that the Fed will raise rates by another 25 basis points next Tuesday, but issue a statement that suggests that this will be the last in the string," he said.

"To be honest, though, our confidence in this prediction is at a very modest level," he said.

While the Fed will be the big focus in the week ahead, markets will also follow a flurry of official updates on consumer credit, productivity, the trade deficit, July retail sales and export and import prices.

The retail sales report, which is due to be released on Friday, is likely to be closely tracked as job growth was flat in the sector last month.

Wall Street analysts expect retail sales to rise 0.6 percent. Excluding autos, sales are forecast to rise 0.5 percent.

Any gain would mark a rebound in retail sales from the 0.1 percent drop registered in June as consumers cut back in the face of rocketing energy costs and rising interest rates.

June's consumer credit number is forecast to come in at four billion dollars, compared with a reading of 4.4 billion in May.

Ahead of the Fed meeting, bond prices rose over the past week on the perception that growth is cooling.

The yield on the 10-year Treasury bond dropped to 4.903 percent from 4.990 percent a week earlier, while that on the 30-year bond fell to 4.996 percent from 5.067 percent. Bond yields and prices move in opposite directions.

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