Crucial Week Before Fed Meeting

Last week the market rallied on the prospect that Federal Reserve could pause in hiking rates at their forthcoming meeting on Aug. 8. It's quite evident from the drop in bond yields in Treasury market that many people expect the economy will continue to cool off.

This week we expect bearish trends taking over the market with traders opting to wait and watch the economic data and the mood in the street. Three key reports to be released this week will be keenly observed
(i) The Institute for Supply Management (ISM) will report Tuesday on its monthly manufacturing activity index for July. People are expecting the diffusion index to decline slightly from 53.8% reported for June. Readings over 50% indicate economic expansion.
(ii) The ISM's nonmanufacturing survey will be released on Thursday. People are expecting it to hold steady at June's figure of 57.0%.
(iii) Last but most important: The July payroll data will be released Friday. This might provide the definitive answer as to whether Fed would raise the short term interest rate again on August 8 or would rather pause for the first time after 17 rate hikes over the past two years. Job gains have been anemic in the 2nd quarter, averaging 108,000 jobs. If job growth tops 200,000 in July, the Fed might continue its uptrend but a sluggish number below 100,000 will reinforce the prevalent view of the street that the economy is slowing down and a pause or even a drop in the rate would be the option. A number somewhere in between would leave Friday's market hanging in the air.

This week will also eagerly await a number of crucial earning reports from some of the bellweather companies in order to gauge the trend of the economy. The list includes: Procter & Gamble (PG), Prudential Financial (PRU), Time Warner (TWX) and Starbucks (SBUX) .