Wall Street gears up for monetary and fiscal stimulus climax

The US economy has been kick-started into growth but stock investors still face an uncertain outlook as Wall Street gears up for comments from the Federal Reserve and a key report on employment this week.

The Fed's monthly policy statement could signal fewer liquidity measures for markets, while nonfarm payroll data and the Institute for Supply Management surveys on the manufacturing and services sectors will give early indications of how the economy is faring in the fourth quarter.

Investors are nervous that monetary and fiscal stimulus measures may be ended too soon.

"If the government pulls out too early and they are not spending, [and] the consumer is not spending, you've got a big issue," said Anthony Conroy, Head Trader for BNY ConvergEx, an affiliate of the Bank of New York. US stocks slumped on Friday in a stark reminder that investors remain sensitive to signs of economic weakness. The Standard & Poor's 500 Index closed out its first down month in eight on October's final trading day as investors questioned the sustainability of the rally.

"You got a spurt that was stimulus driven," said Fred Dickson, a market strategist at DA Davidson in Lake Oswego. "The common belief right now is that the economy will move forward in the fourth quarter, but probably at a little slower pace than in the third quarter," said Dickson.

Financial markets are bracing for a possible change of wording in the Federal Open Market Committee's statement, expected on Wednesday at the end of its two-day meeting, that could hint interest rates are headed higher late next year. That, and any hint the Fed may start to pull back some of the liquidity it has been providing to markets through its debt purchases, could hurt stocks.

"If you got language along those lines that suggested that they could be raising may be a little bit earlier than what folks were expecting, then yes, I would expect the market to sell off on that news," said Thomas Wilson, Managing Director in the institutional investments and private client group at Brinker Capital in Berwyn, Pennsylvania.

The number of jobs cut by US employers is expected to have fallen in October. But a negative surprise such as last month, when the unemployment rate hit its highest level in 26 years, could undermine confidence in the recovery, driving stocks lower.

The nonfarm payrolls data, due on Friday, is expected to show US employers cut 175,000 jobs in October, according to economists polled by Reuters.

In comparison, September's job cuts totaled 263,000, far exceeding economists' forecast.

The US unemployment rate is forecast to rise to 9.9 per cent in October from September's 9.8 per cent. Third-quarter earnings season is winding down, but a few bellwethers could offer further insight into the troubled economy.

Earnings and the outlook from Ford Motor Company, the only US car manufacturer to avoid bankruptcy, could be an important indication of how auto sales might fare without government help.

Ford's report on Monday will be followed by US auto sales data the next day. Analysts and executives expect total US vehicle sales to rise to an annual rate of about 9.8 million units in October, up from 9.2 million the month before.

US auto sales boomed in August as $3 billion (Dh11bn) in the federal government's "cash for clunkers" incentives drove sharp gains. Pulte Homes, the largest US home builder after its merger with Centex over the summer, is set to report earnings on Wednesday. The comments of its management will be watched closely for signs the nascent US housing recovery is finding firmer ground. Pending home sales, due on Monday, are expected to be unchanged in September after jumping 6.4 per cent in August.

Talk of ending a $8,000 tax credit for first-time home buyers, which helped support the housing market, has ruffled investors. The tax credit is set to expire on November 30.

Congress is considering a proposal to extend the tax credit. But before a deal is cut, it remains a wild card for markets.

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