US stocks: Markets in Fed countdown mode

NEW YORK - Fed watchers will take over Wall Street this week as the Federal Open Market Committee's meeting could give stock investors more clues on the outlook for interest rates.

Financial markets now fully expect the 17th consecutive increase in US interest rates on Thursday, after a flurry of speeches from Fed officials and data showing core inflation picked up in May.

But investors also will give a laser-like focus to the FOMC's statement in search of information about when the Fed might take a break in its cycle of interest-rate rises. The credit-tightening campaign began on June 30, 2004.

"I don't think anyone is going to focus on anything but the Fed," said Milton Ezrati, senior economic strategist at Lord Abbett & Co. in Jersey City, New Jersey. "The Fed speakers have effectively warned us that there will be another rate hike and they have also set the stage for us to start thinking about inflation expectations."

For the week, stocks fell as investors were jittery in anticipation of the Fed meeting. The Dow Jones industrial average finished the week down 0.23 per cent, while the Standard & Poor's 500 Index fell 0.56 per cent and the Nasdaq Composite Index dropped 0.40 per cent.

On Friday, fed fund futures showed investors believe the FOMC will raise rates again at its August meeting, as well as in June.

Wall Street expects the fed funds rate for overnight bank loans, now at 5 per cent, will be raised to 5.25 per cent. Fed fund futures indicated there is a strong chance the fed funds rate will go up to 5.5 per cent in August.

A DIFFICULT QUARTER

Volume is likely to be light, with traders unwilling to make big moves before the Fed's decision.

"There is not much momentum," Ezrati said. "Everyone will take their positions and then hold their breath."

The main event for Wall Street will come on Thursday, around 2:15 p.m. EDT (1815 GMT) , when the Fed's rate announcement and policy statement are expected.

The coming week also marks the end of the second quarter.

As things stand now, it is shaping up to be the most difficult quarter for stocks since the third quarter of 2002 when worries about corporate earnings and accounting scandals pushed stocks to their worst performance since 1987.

So far, for the quarter, the Dow is down 1.1 per cent, the S&P 500 is down 3.9 per cent, and the Nasdaq is off 9.3 per cent.

THE FED'S GUESSING GAME

Investors have low expectations that the Fed will offer any information that could help boost the market this week.

"I think we'll get transparency from the Fed, but I don't think we'll get a lot of clarity," said Jeff Kleintop, chief investment strategist at PNC Advisors in Philadelphia.

Since the year began, investors have been hoping that the Fed was about to halt its cycle of interest-rate increases.

But the US central bank has kept them guessing.

Investors might want the Fed to supply a road map for future rate increases, but analysts said that was unlikely.

"I don't think the Fed really knows where they're going, and people are going to watch the economic numbers," Todd Leone, head of listed trading at Cowen & Co. in New York, said, referring to the Fed officials' statements that suggest the Fed will remain data-dependent.

DATA ON HOME SALES AND CONSUMERS

In fact, investors will get extra helpings of economic data this week, with some earnings reports also in the mix.

Economists are anticipating that reports on new home sales and existing home sales in May, due on Monday and Tuesday, respectively, will show that housing sector activity slowed from the previous month.

The forecast, according to economists polled by Reuters, calls for new home sales to drop to an annual pace of 1.15 million units in May from 1.198 million units in April. These economists believe existing home sales will slip to a rate of 6.64 million units in May from 6.76 million in April.

On the consumer front, the Conference Board's consumer confidence index for June will be released on Tuesday. The forecast pegs it at 103.5, nearly even with the previous reading of 103.2, the Reuters poll showed. The University of Michigan's final consumer sentiment number for June is due on Friday. The forecast: 82.5, up from 79.1 previously.

Personal income and consumption figures for May are due on Friday. The forecast from the Reuters poll: Personal income went up 0.2 per cent in May, while personal consumption rose 0.4 per cent, and the core PCE price index, an inflation gauge favored by the Fed, increased 0.2 per cent.

Earnings reports from drugstore group Walgreen Co.