Wall Street could extend gains next week if financial results from market bellwethers and data suggest the U.S economic slowdown isn’t as dire as once feared.
A slide in energy prices is a welcome boost in an economy hamstrung by the housing slump and mounting mortgage losses in the financial services sector. In the near term, consumers and business should feel some respite as energy costs recede, boosting prospects for a range of market constituents, including airlines, retail, industrial and technology sectors.
Oil’s downward trend helped boost consumer spending slightly in the past month, with crude hitting a three-month low below $114 a barrel on Friday. But its path remains volatile, prompting some investors to remain cautious about the market.
The dollar’s recent jump suggests to some that the health of the US economy could improve. The US economy began weakening before others and now that investors are seeing poor economic data from Europe and Asia, some think the United States is closer to a recovery than others.
“For the past two years, crude has followed the dollar almost lock-step.”
“The strength we’ve seen in the dollar is almost certainly helping bring crude down. At this point, as you move backward, it actually acts as a stimulus on the economy.”
That said, news on the consumer cannot be ignored. Although petrol prices have fallen since last month, consumer spending – which accounts for two-thirds of the US economy – continues to falter.
Next week, investors will get further data after quarterly earnings from retail giant Target, home improvement retailers Home Depot and Lowe’s Companies, and tech bellwether Hewlett-Packard.
This comes after J C Penney, Wal-Mart Stores, Nordstrom and Macy’s posted earnings this week that exceeded analysts’ estimates, but issued cautious forecasts for the second half of the year amid concerns on slow consumer spending.
New data on the Producer Price Index, housing starts and manufacturing will also be released next week. But the price of oil and the value of the dollar are more likely to sway investors, analysts said, because the data is based on oil and commodity prices last month, which were markedly higher.
Investors are also still wary of the rally in financial stocks in the past week, as analysts emphasise that the fallout from the credit crisis is far from over.
Thin trading volume indicates that there is still widespread concern about the US economy’s health, especially following a $1.5 billion write-off from JPMorgan Chase and Company.
Two economic reports on housing are expected next week. Tomorrow, the National Association of Home Builders will release its Housing Market Index for the month. On Tuesday, the government releases last month’s housing starts.
Analysts expect the government data to show housing starts slipped to a seasonally adjusted annual rate of 960,000 units, slightly below June’s seasonally adjusted annual pace of 1.066 million units.
Data from the Federal Reserve Bank of Philadelphia on Thursday could be an important indicator of consumer spending in the year’s second half.
But the focus next week will be on oil and the dollar. Oil prices fell below $114 a barrel on Friday, down from $115.20 a week ago on growing concerns about demand in industrial nations and the stronger dollar.
Equally important, crude has fallen sharply since reaching an all-time high of $147.27 a barrel on July 11 as growing global economic problems and high fuel prices have cut demand in the US and Europe.
On Friday, the front-month US crude oil futures contract fell $1.24 to settle at $113.77 a barrel – down 23 per cent from last month’s record on the New York Mercantile Exchange.
But investors are keeping a wary eye on the continued fighting between Russia and Georgia. Russian armed forces have occupied parts of Georgia since repelling a Georgian attack last week on the tiny pro-Russian separatist territory of South Ossetia, which in the 1990s threw off control of Tbilisi, the capital of Georgia. Any geopolitical developments, whether it be the Iranian situation or further developments with Russia and Georgia, will influence oil markets.