08/12/2012 12:05:00

MARKET SNAPSHOT: Fed Action Expected, But Fiscal-cliff Clouds View

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By Carla Mozee, MarketWatch

LOS ANGELES (MarketWatch) -- The Federal Reserve is expected to unveil more stimulus for the economy next week, but the contentious talks in Washington over tax hikes and spending cuts will remain the primary focus for U.S. equity investors.

The fiscal-cliff "headlines will continue to be the ones that will roil the market or make it happy, either way," said Bill Stone, chief investment strategist at PNC Wealth Management, in a telephone interview.

Retail sales for November are also due next week, with further reads from the sector to come in the form of quarterly reports from discounter Dollar General Corp. (DG) on Tuesday and Costco Wholesale Corp. (COST) on Wednesday. Each is expected to post gains in earnings and sales from the year-ago period.

Software maker Adobe Systems Inc. (ADBE) is scheduled to release its latest quarterly report on Thursday, and mining-equipment company Joy Global Inc. (JOY) will release its results on Wednesday. In the semiconductor sector, Texas Instruments Inc. (TXN) will issue a mid-quarter update on Monday.

Twists and turn

The Federal Open Market Committee begins a two-day meeting on Tuesday, with a monetary-policy announcement and Chairman Ben Bernanke's press conference due on Wednesday.

The Fed is expected to unveil more stimulus for the economy as its Operation Twist program expires. Twist, which was started in September of last year, was aimed at lowering mortgage and corporate bond rates through buying long-term debt and selling short-term holdings.

"With the Fed running out of short-term securities to sell," the market is expecting "that there will be some new version of monetary stimulus and monetary easing," said Katie Nixon, chief investment officer of wealth management at Northern Trust. "More asset purchases clearly are what the market has been looking for and continued injections of liquidity are what are providing, I think, a nice tailwind generally to risky assets."

The Fed is expected to say it will add $40 billion to $45 billion per month in purchases of long-term Treasuries to its third round of quantitative easing, or QE3, when Twist ends, according to Raymond James. The Fed is also expected to hold interest rates at the record low range of 0% to 0.25%.

The Fed meeting notwithstanding, Wall Street remains foremost on fiscal-policy watch as Democrats and Republicans try to hammer out a deal to avert the fiscal cliff, or the $600 billion in tax increases and spending cuts set to go into effect on Jan. 1. The two sides on Friday were no closer to announcing a resolution, with House Speaker John Boehner saying little progress has been made in the negotiations.

"There's inertia that's set in right now, with investors and corporations [...] waiting for some signal from Washington in terms of what the future may hold so that they can plan appropriately," said Nixon.

PNC's Stone said the progress made by lawmakers will likely drive the direction of stocks as the end of 2012 approaches. He said there's a 50% chance that a fiscal-cliff deal won't be reached until early next year.

If lawmakers "say we've got the framework of a deal and we can come right back and finish it out, it might be positive," for the market, he said. "If they leave it with a 'no middle-of-the-road place to meet,' I think that has a good chance to weigh on the market."

Northern Trust's Nixon said investors have been sitting on cash and on low-yielding fixed-income securities, "because they don't want to push out on the risk spectrum necessarily if we do careen over the fiscal cliff and the U.S. does go into recession in the first part of next year."

The fiscal cliff stems from a deal signed by President Barack Obama in August 2011 to end fighting between Democrats and Republican over raising the federal debt ceiling. Republicans want to extend Bush-era tax cuts for the wealthiest 2% of Americans, saying more revenue could be raised by curbing tax deductions for top earners. The White House argues not enough revenue could come from that source without also ending deductions that are widely used by middle-class Americans.

Some companies have been taking defensive action, with Costco among those that have launched special dividends in anticipation of a jump in taxes on dividends.

Worries on Main Street about the fiscal cliff appeared to have hit consumer sentiment this month. On Friday, the preliminary University of Michigan-Thomson Reuters consumer-sentiment index fell to 74.5, far below the 82.0 reading expected by a MarketWatch poll of economists. The result represented the biggest one-month drop since March 2011.

U.S. stocks finished mostly higher on Friday following a better-than-expected November jobs report.

For the week, the Dow Jones Industrial Average (DJI) rose 1%. The S&P 500 index (SPX) edged up 0.1%, while the Nasdaq Composite index (RIXF) fell 1.1%.

Data due

Retail sales for November, due Thursday, are expected by analysts polled by MarketWatch to rise 0.2%. Retail sales in October fell a seasonally adjusted 0.3%, the sharpest amount since June, with the result reflecting the impact of Hurricane Sandy and weak consumer demand in some areas including the auto sector.

"With 70% of [gross domestic product] tied up in consumer spending, there's no doubt that that matters," said PNC's Stone of the upcoming report. In the wake of Sandy, "you should see some sort of rebound" relative to last month's figures.

But Nixon at Northern Trust said it may be difficult for the market to assess macroeconomic data right now: "We have the dual issues of the fiscal cliff and Hurricane Sandy [...] and these two issues can't be discounted."

On Thursday, weekly jobless claims and a report on wholesale costs in November is slated to arrive. Investors on Friday will get a look at prices paid by consumers last month for food, gasoline and other goods, and the government will provide a snapshot of industrial output in November.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

December 08, 2012 07:05 ET (12:05 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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