Markets: No bogeymen?

Inflation worries are set aside ... but still there are those deficits on the horizon.

February 6, 2005: 10:42 AM EST



NEW YORK (CNN/Money) - Now that inflation is dead, the markets will have to find something else to worry about in the coming week.

There are plenty of candidates -- oil, the dollar, trade and budget deficits -- but no strong contender.

The leading bogeyman was put to rest, at least for a little while, by Friday's jobs report. While the employment picture ostensibly brightened with 146,000 jobs added and the jobless rate falling to 5.2 percent, the report fell far short of Wall Street expectations.

Traders had expected a more dramatic surge in jobs, increasing pressure for pay raises and awakening the inflation monster. That, in turn, would prompt the Federal Reserve to get more aggressive about raising interest rates, lest the monster get out of control.

But since that job jump failed to appear, traders put aside those worries and the market surged ahead.

"It is obvious that the economy continues to grow and that the job market is growing," said Peter Cardillo, chief market analyst at S.W. Bach. "(Friday's) numbers are offering investors a sense of relief that perhaps the Fed may not have to be too aggressive in raising interest rates."

The Dow Jones industrial average gained 1.2 percent while the broader Standard & Poor's 500 index rose 1.1 percent. A strong boost from the semiconductor sector helped the Nasdaq composite advance 1.4 percent.

For the week, the Dow rose 2.8 percent, the S&P added 2.7 percent, and the Nasdaq tacked on 2.5 percent.

Despite the good week, old fears will have plenty of opportunity to resurface and weigh on markets. On Tuesday, the Bush Administration submits its federal budget to Congress, detailing its plan for cutting the current deficit. Two days later the government will release trade numbers for December.


Those twin deficits lie at the heart of the current weakness of the dollar and concerns that it might slide into free fall. Should the Bush administration's budget fail to convince critics that it has a solid plan for cutting government debt, or should the trade gap again show surprising growth, markets could flutter.

But the outlook is encouraging on both fronts, at least to Fed Chairman Alan Greenspan. In comments Friday, he said Friday market forces and likely action by Washington to cut its budget deficit "appear poised" to stabilize, and perhaps cut, the record U.S. trade gap. Those comments, plus a reinforcement of the currency policy status quo by industrialized nations over the weekend, helped bolster the dollar, setting a positive tone for the coming week in currency markets.

Meanwhile oil, the market's recurrent nightmare over the last two years, seems to be in a holding pattern. After a three-day decline in prices, crude oil treaded water on Friday. The latest inventory numbers, which showed healthy supplies, are the major factor keeping prices low. Warm weather forecasts in the Northeast United States will likely continue that trend. However, continued rumblings from OPEC about cutting production could reignite jitters in the market.


On the corporate front, earnings will still be coming in, although not at such a torrid pace. The tech sector will get some direction from the world's largest computer maker, Dell, which reports on Thursday, and a network equipment heavy weight, Cisco, which reports on Tuesday. In addition, Google will hold an analyst meeting Wednesday, a discussion sure to attract interest from Internet minded investors.