Bear and Fed set stage for rocky week

NEW YORK (Reuters) - The rocky ride for the U.S. stock market looked set to intensify this week, as investors worried there could be more victims of the global credit crisis after JPMorgan Chase bailed out Bear Stearns BSC.N.

On Sunday evening, U.S. stock index futures were pointing to a sharply lower open after JPMorgan Chase & Co (JPM.N) bought stricken rival Bear Stearns BSC.N for a rock-bottom price.

In a surprise move, the U.S. Federal Reserve cut the discount rate it charges on direct loans to banks and announced a new program to lend directly to Wall Street dealers.

The new the biggest sign yet of how devastating the credit crisis is for Wall Street, pushed the U.S. dollar to a new record low against the euro and pummeled Asian stock markets early Monday.

U.S. stock indexes futures on Sunday evening were pointing to a sharply lower open on Wall Street on Monday. S&P 500 futures fell 27 points, while Nasdaq futures slid 35.75 points. Dow futures were down 200 points.

"I can't imagine it's going to be a good day in financial markets tomorrow just because of fear -- and not because of any particular knowledge -- but just because of fear of what could be in or what's not in all financial service company balance sheets," said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York on Sunday.

More clarity on how other investment banks weathered the credit market meltdown could come when three major Wall Street firms report their first quarter earnings this week.

Lehman Brothers LEH.N and Goldman Sachs (GS.N) will report earnings on Tuesday, followed by Morgan Stanley (MS.N) on Wednesday. Bear Stearns said on Sunday evening it would no longer be announcing first-quarter earnings on Monday.

On Friday, Lehman's stock was the second-biggest decliner among investment banks, falling 14.6 percent, or $6.73, to close at $39.26 on the New York Stock Exchange.

Forecasts and stock prices have come down sharply for all the big banks, as the credit crunch spreads across almost every market.

FED FOCUS

The Federal Reserve's policy-setting meeting on Tuesday will also be a highlight of the holiday-shortened week. The U.S. stock market will be closed for Good Friday.

U.S. interest-rate futures showed more than a 50 percent chance on Friday that the central bank will cut its benchmark fed funds rate target by 100 basis points this week to revive an economy that many say is already in recession.

"Most of the focus will be on the Federal Reserve. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" asked Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."

Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of the gains were gone by the end of the week.

S&P SKATES CLOSE TO THE BEAR

For US stocks broadly, the S&P 500 index was close to falling into a bear market last week. If it drops further this week, it could cross a threshold that normally indicates a bear market, a drop of 20 percent from its October closing high. The Nasdaq turned bearish last month.

The Dow Jones industrial average .DJI fell 194.65 points, or 1.60 percent, to end on Friday at 11,951.09, with only one of the 30 Dow components, Boeing Co. (BA.N), finishing higher. The Standard & Poor's 500 index .SPX fell 27.34 points, or 2.08 percent, to 1,288.14, and the Nasdaq Composite Index .IXIC lost 51.12 points, or 2.26 percent, to close at 2,212.49.

For the week, the Dow industrials gained 0.48 percent though, thanks to Tuesday's huge rally, but the Standard & Poor's 500 index .SPX slipped 0.40 percent and the Nasdaq was unchanged.

For the year, the Dow is down 9.90 percent, the S&P 500 is off 12.27 percent and the Nasdaq has lost 16.58 percent.

PPI, HOUSING AND RECESSION

Among the coming week's key economic data will be the U.S. Producer Price Index on Tuesday, with investors concerned about rising inflation even as the economy slows. Economists polled by Reuters expect February core PPI, excluding volatile food and energy prices, to rise 0.2 percent. In January, core PPI gained 0.4 percent.

On Friday, a government report unexpectedly showed February's Consumer Price Index, another top inflation gauge, was unchanged. While that leaves more room for the Federal Reserve to cut interest rates, analysts were skeptical about the tame inflation picture painted by the data because prices of oil, gold and other commodities recently hit record highs.

Wall Street will get some other economic data this week that could give more clues about the U.S. economy's health, with industrial production and capacity utilization due Monday and February housing starts set for Tuesday.

Weekly jobless claims and a March index of regional business activity from the Federal Reserve Bank of Philadelphia will round out the economic week on Thursday.

Wall Street will have one thing in mind as it watches the week's stream of numbers, Johnson said.

"The question is: Did the economy enter a recession in February? We will get an answer to that question when we see the industrial production and housing numbers," he said.