Sun, Jun 25, 2006 page10

• US markets down ahead of Fed meeting

  BATED BREATH Markets went into a defensive crouch ahead of Wednesday and Thursday's Fed meeting, which is expected to result in another interest rate hike

  • AFP
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  Wall Street's focus will be squarely on the Federal Reserve in the coming week as the market tries to break out of its recent torpor, analysts say.

  Investors are looking to the Fed, which holds a two-day policymaking meeting on Wednesday and Thursday, for reassurance that the central bank will not choke off economic and profit growth as it tries to battle inflationary pressures.

  In the week to Friday, the Dow Jones Industrial Average lost 0.23 percent to end at 10,989.09 while the tech-heavy NASDAQ composite declined 0.40 percent to 2,121.47.

  

  Shares in Kerr McGee stock are traded on the floor of the New York Stock Exchange on Friday. Oil and natural gas producer Anadarko Petroleum Corp on Friday agreed to pay US$21 billion to acquire two smaller competitors, Kerr-McGee Corp and Western Gas Resources Inc, in a bid to boost its North American output.

  PHOTO: AP

  The broad-market Standard and Poor's 500 retreated 0.56 percent to 1,251.54.

  Analysts say that amid conflicting signals on the economy, the market will look to the Federal Reserve for assurance that growth remains on track, and that the central bank will not go too far in fighting inflation.

  But the market has been skittish, with many investors skeptical about the Fed engineering a "soft landing."

  The central bank is expected to make its 17th consecutive rate increase to bring the federal funds rate to 5.25 percent. But the outlook after that is uncertain.

  "It is generally accepted that there will be 25 basis point increase in the rate but opinion is divided as to whether the Fed will slam the market with a higher increase and then pause or keep the pressure on through the August meeting," said Fred Dickson, market strategist at DA Davidson.

  "More and more, the concern is that in an effort to prove he is a strong inflation hawk, [Fed chairman Ben] Bernanke will press too hard on the brakes. Barring unexpectedly strong corporate news, which is unlikely at this point, the market is likely to do nothing but chew its nails and wait," he said.

  Some experts say the Fed and new chairman Bernanke must send a signal to markets that it will be tough and not let inflation get out of control even if it means chilling the economy temporarily.

  "Bernanke, under fire early on in his tenure as the Fed's chair, also can't afford to risk displeasing the bond market vigilantes further with more hints of a rate pause," said Peter Buchanan at CIBC World Markets.

  Other analysts say the market has already priced in a somewhat gloomy scenario, and that the economy appears healthy along with corporate profits, so the next move is likely to be higher.

  "Although it has been a disquieting six weeks for equity investors, we advise staying the course," said Harvey Hirschhorn, chief portfolio strategist at Bank of America.

  "We expect continued, sustainable economic expansion, price-to-earnings multiples above their long-term average level and ongoing corporate profit growth, albeit at a moderating rate," he said.

  John Wilson, equity strategist at Morgan Keegan said the market correction over the past few weeks may have run its course.

  "It is looking more and more as if we have, in fact, seen the lows for this correction," he said, while remaining somewhat cautious for the coming week.

  "We still have a week to go in the quarter and the possibility that we'll see some window dressing on the part of portfolio managers who want their quarter end statements to show that they anticipated the correction and are not heavily invested in the groups that got hit the worst. As a result, we might see some funny group action over the next few days," he said.

  The bond market fell as traders pushed up yields in anticipation of more Fed rate hikes. Yields on the 10-year Treasury bond rose to 5.228 percent from 5.128 percent a week earlier and the 30-year bond yield increased to 5.257 percent from 5.172 percent.

  Bond yields and prices move in opposite directions.
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