KEY POINTS:
Wall Street is heading for another volatile week, but the bulls could get a further reprieve if calm brought on by the Federal Reserve's liquidity injections and a surprise cut in its discount rate lasts.
The coming week has a slew of economic indicators, including July existing home
sales and preliminary figures on second-quarter gross domestic product, which should shed more light on the economy's health.
But paramount to Wall Street will be what the data says about the prospects for a cut in the fed funds rate as the housing slump fuels worries that the sector's slowdown could tip the world's largest economy into a recession.
"Wall Street is banking on a mid-cycle slowdown that was expected but could get worse, suggesting that the Fed may want to lower the fed funds rate," said Rob Goodman, director of investments for Fairport Asset Management, in Cleveland.
"A cut is not out of the realm of possibilities ... and I don't expect Wall Street to be too negative going forward."
But even with the burgeoning calm, money managers and analysts say a sense that there could yet be more upheaval due to weakness in the housing industry still pervades the market and could make for cautious trading ahead of the Labor Day holiday on Monday, September 3.
More worrisome, analysts and money managers said would be any news that pointed to further turmoil in the subprime mortgage sector.
This past week several mortgage providers, including Accredited Home Lenders, said they were cutting hundreds of jobs as the lending squeeze and lingering jitters in the credit markets take their toll.
Surprisingly strong data on July new home sales and durable goods orders contributed to Friday's stock gains. The Dow Jones industrial average rose 2.3 per cent for the week, its best weekly advance since April 22. Both the Nasdaq Composite Index and the S&P 500 notched their biggest weekly gains in five months, with the Nasdaq rising 2.9 per cent and the S&P gaining 2.3 per cent.
"If the consumer can come out of subprime OK, then the market will come out of subprime OK," said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray, in Minneapolis.
He said the jobs report, due a week before the Fed's policy-setters meet on September 18 to decide on interest rates, was among the pieces of data that may seal the market's fate in the days ahead, along with reports on housing.
"If those numbers turn south, that's going to really increase recession fears."
- Reuters