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Wall Street expects Federal Reserve policy-makers to cut interest rates on Wednesday to ease a global credit squeeze, a much anticipated event that spurred stock prices higher last week and could boost them this week.
Investors expect the Federal Open Market Committee to cut the federal funds rate
in response to concerns that the US economy is slowing and may be heading into recession.
Short-term interest rate futures on Friday indicated investors believe a half a percentage point cut in the federal funds rate is slightly more likely than a quarter percentage point cut.
Some investors say the stock market has priced in a quarter-percentage point rise, limiting any upside.
But if the past was a guide, said David Bianco, chief US equity strategist at UBS in New York, investors would react to the actual event.
"I think the market's going to have a positive reaction to it, I really do," said Bianco, who expects a 25 basis point cut in the federal funds rate and a 50 basis point cut in the discount rate.
"It will signal a response to what's going on, to try to prevent credit market troubles from spreading to the real economy."
Reuters polls showed last week that economists see about a 30 per cent chance that the United States enters recession in the next 12 months ifthe effects of a housing slowdowncontinue to seep into the wider economy.
Major US stock market gauges moved up last week in anticipation of a rate cut, with the Dow Jones industrial average posting its best week since April.
For the week, the Dow rose 2.5 per cent, the benchmark Standard & Poor's 500 Index gained 2.1 per cent and the Nasdaq Composite Index rose 1.4 per cent.
On Friday, the Dow closed up 17.64 points, or 0.13 per cent, at 13,442.52; the S&P 500 closed up 0.30 points, or 0.02 per cent, at 1484.25, and the Nasdaq closed up 1.12 points, or 0.04 per cent, at 2602.18.
Investors will want to see if the subprime mortgage trauma has worsened for four big investment banks - Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs - when they release fiscal third-quarter earnings results over three days this week.
The release of third-quarter earnings for most companies does not begin in earnest until October.
Michael Cuggino, chief investment officer of the Permanent Portfolio family of funds in San Francisco, said the banks had diversified business models and were able to profit from worldwide economic growth, which would alleviate any downdraft of credit market issues.
Volatility is likely to intensify at week's end because of the expiration of four different options and futures contracts, a quarterly event known as "quadruple witching".
Investors will also be parsing inflation data for August, information on housing starts and building permits, also for August, and unemployment claims for the week ending September 15.
- Reuters
