KEY POINTS:
NEW YORK - A big interest-rate cut by the Federal Reserve early on Wednesday (NZT), or at least a hint more cuts are coming, coupled with this week's sub-prime rescue plan could lift investor confidence and inspire a pre-Christmas rally.
While most investors are banking on a cut of at least a quarter percentage point in the benchmark fed funds rate, many think a deeper reduction is needed to unfreeze credit markets and boost confidence.
On Friday, President George W. Bush announced a plan to stem US home foreclosures, sending stocks surging on optimism it would keep the economy from sliding into a recession.
"The big focus this week is the Fed meeting," said John Praveen, of Prudential International Investments Advisers.
He said that while the market was pricing in an interest-rate cut, there was still speculation about how big such a cut would be and whether the Fed also would cut the discount rate.
Encouraging data last week, including a resilient payrolls report on Saturday, eased some concerns about the economy, decreasing the likelihood of an aggressive 50-basis-point cut in the fed funds rate.
Based on December fed fund futures, the likelihood of a 50-basis-point rate cut stood at 41 per cent at midday on Friday, down from 65 per cent a week earlier.
The fed funds rate for overnight bank loans now stands at 4.50 per cent, following two back-to-back rate cuts - 25 basis points on October 31 and 50 basis points on September 18.
For the week, stocks gained, with the Dow Jones industrial average up 1.9 per cent, the Standard & Poor's 500 up 1.6 per cent and the Nasdaq Composite Index up 1.7 per cent.
And with just three more weeks left in the year, the Dow is up 9.3 per cent so far in 2007. The S&P 500 is up 6.9 per cent for the year to date, and the Nasdaq is up 12 per cent.
While investors are primarily focusing on a potential rate cut on Wednesday, they will also be closely watching inflation data later in the week.
The Labour Department will release its Producer Price Index for November on Friday, and the Consumer Price Index is due on Saturday.
The consensus forecast is for an increase of 1.5 per cent in overall PPI and a 0.2 per cent gain in core PPI, which factors out volatile food and energy prices.
The overall CPI is expected to rise 0.6 per cent, while core CPI is forecast to gain 0.2 per cent.
- Reuters
