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THE DAY AHEAD: Market Preview

3 min read

Stocks will start off at a crawl and pick up after the Fed announces its move later this afternoon. Asia rose and Europe was mixed. The Dow won't budge until Wall Street hears what the central bank decides to do with interest rates.


The Fed is coming to get you, the Fed is coming to get you! The U.S. central bank's monetary policy-making arm meets today to discuss what to do about the economy.

Until the Consumer Price Index for April came in hotter than expected, Wall Street had hoped that the U.S. economy would continue on in its Goldilocks tradition: not too hot to raise interest rates, not too cool to cut them. However, the CPI, a general gauge of how much consumers spend on staple items, came in much higher than expected - indicating that the Fed may have to intervene to keep inflation in check.

A rate hike hurts stocks in several ways. One, it costs more for businesses to borrow money to expand their business and two, stocks become less attractive to bonds when interest rates increase.

The Dow's been in a retreat, down 283 points from Thursday's close, since the CPI put a monkey wrench into things. It should be noted that the Dow was mainly pushed higher by excitement over IBM Corp.'s (NYSE: IBM) announcement that it will get a quarter of its sales from Internet services. Big Blue, which comprises about 9 percent of the bellwether's value, pushed the Dow up about 100 points.

That brings us to today. The Fed is likely to announce a quarter-point increase in the overnight borrowing rate, to 5 percent, taking back its last cut. At the very least, the Fed will indicate a bias towards raising rates at the next meeting. Don't expect much from the market before the announcement. Most have already spent the last few days adjusting ahead of today's announcement, which is scheduled to 2:15 p.m. EST. Stocks may head slightly higher after the Fed states its bias towards interest rates as Wall Street finally exhales.

For the remainder of the week, techs should continue to outperform blue chips. Though the big caps are likely to stage their own recovery after the Fed's meeting fades quickly into the past. Hewlett-Packard's (NYSE: HWP) earnings could also give the Dow a slight boost.

Applied Materials, Cirrus Logic, Dell, Hewlett-Packard, Lycos and Ultradata are likely to be among Tuesday's most active stocks.

On Monday, techs followed what seems to be a static trend: Techs bounce. A flurry of buying at the end hauled the technology sector out of the rut it was sitting in for most of Monday's session. The Nasdaq rose 33 to 2,561 and the Dow slid 59 to 10,853.

The Inter@ctive Week @Net Index rose 8 to 328.

At the Bell

The Dow Jones industrial average will hardly budge at the bell as all eyes are pinned on the Fed. The Standard & Poor's 500 index for June futures contracts added 0.2 points to 1,341.2 at 7:21 a.m. EST in 24-hour electronic trading, are indicating a 16-point gain in the global bellwether.


Asia staged a mild recovery. The Nikkei 225 in Tokyo dipped 0.26 percent to 16,378, the Seoul composite in South Korea gained 1.6 percent to 729, Singapore's Strait Times index added 1.99 percent to 1,917 and Hong Kong's Hang Seng edged up 0.31 percent to 12,627.


European markets were mixed after the Dow slipped on Monday. London's FTSE 100 dipped 0.13 percent to 6,158, the CAC 40 in Paris added half a percent to 4,270 and the Xetra DAX in Frankfurt gained 0.3 percent to 5,116 at 7:46 a.m. EST.