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All eyes on Fed next week
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May 14, 1999: 7:13 p.m. ET
Meeting of the Federal Open Market Committee the only game in town
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NEW YORK (CNNfn) - Wall Street will have little choice but to look toward Washington next week as the Federal Reserve meets to decide interest rate policy.
On Tuesday, the Federal Open Market Committee, the policy-making arm of the Federal Reserve, will meet to discuss inflation and interest rates, and, for the markets, it's the only game in town.
Investors got something of a shock Friday when the Labor Department said consumer prices rose faster than expected last month, sending stock markets sharply lower and bond yields higher.
"The markets are going to be looking at it more clearly now that the major numbers have been released," said Peter Cardillo, director of research at Westfalia Investments.
The government said the Consumer Price Index jumped 0.7 percent during the month, the largest such increase in more than eight years, spurred largely by rising oil prices.
The results of the key inflation indicator were much higher than the 0.4 percent increase predicted by a survey of economists.
Fed to take a hard look at CPI
The FOMC is widely expected to take a close look at the CPI figures, but few experts feel the Fed will raise interest rates on Tuesday. More likely, they say, the FOMC will probably adopt a "tightening" bias.
The bias indicates the direction that Fed policymakers are leaning regarding interest rates. The FOMC now has a neutral stance, meaning it is not leaning either toward lower or higher rates.
Half of the 18 economists surveyed by Reuters said the Fed was now more likely to adopt a "tightening" bias.
The U.S. bond market reacted perhaps predictably, triggering a sell-off that had the benchmark 30-year Treasury bond flirting with a yield of nearly 6 percent.
During the next week the bond market will probably be even more jittery as it approaches the Tuesday Fed decision, according to Charles Crane, chief market strategist at Key Asset Management.
"It will come at a point in time where investors have gotten a couple of body blows, following closely on [Treasury Secretary] Rubin's resignation," said Crane.
"I don't know that the market is in the mood for any more surprises."
Indeed, some on Wall Street are already trying to head off any more unpleasantness. The futures market already has discounted a rate increase of 0.25 percentage points in anticipation of such a hike by the end of the summer.
Still, the Federal Reserve will probably not provide any of those surprises.
"I expect they will stay the line, although the possibility of going from a neutral to a tightening bias has increased," Cardillo said.
Bond buying opportunity?
And while it may be a difficult time for bond traders, for prospective bond buyers this might be a good time to give this area a closer look, said Daniel Fuss, portfolio manager at Loomis Sayles & Co.
"I think they are better than fair value right now," said Fuss, noting that U.S. Treasurys are inexpensive compared to government markets in Europe and Asia.
"In addition, corporate debt relative to government debt in the U.S. is selling at an attractive yield advantage. I think bonds in the U.S. are really quite cheap, Treasurys first but corporates even more so."
Markets will have few other economic reports to play off of next week. About the only release of any import is on Tuesday, when April housing starts figures are issued by the U.S. Commerce Department.
But not all the attention will be on the bond market next week.
Cardillo predicted a general market pullback would be coming soon. Indeed, as the market closed Friday both the Dow Jones industrial average and the tech-heavy Nasdaq composite both finished the day much lower.
If such a pullback were to occur, the larger cap stocks could bear the brunt of it since the smaller caps haven't seen the meteoric rises of their larger counterparts and would then likely fall less, he said.
The approaching summer season is traditionally a weaker period for the market and in the coming weeks, say analysts, the chances of a correction could become more likely.
"We're at very high valuation levels and very nervous investors are understanding that a mistake can take us down a fair amount," said Robert Morris, director of equity at Lord, Abbett & Co.
Morris suggested investors take a two pronged approach. First, since technology is a concern of most companies in the country, that sector should continue to show solid sales and earnings growth.
During a dip, look at the market leaders, he advised. Companies such as IBM (IBM), Unisys (UIS) and Sun Microsystems (SUNW) fit the bill.
The second part of the strategy would be to look for companies with "deep value." Those, he said, can most easily be found in the property and casualty insurance sector.
Investors in the coming weeks will also be looking at cyclical stocks, according to Douglas Altabef, managing director at Matrix Asset Advisors.
Rising price-to-earnings ratios may make some investors nervous and struggling cyclicals may provide an out. "Cyclicals could also be a surrogate for low P/E stocks because many of the cyclicals are very depressed, very cheap," said Altabef.
-- by staff writer Randall J. Schultz
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