NEW YORK (Reuters) - U.S. stock investors could be in for further declines next week, which would worsen the markets’ dismal start to 2008, as banks are due to post quarterly results that some observers expect may contain more mortgage-related surprises.
With fears of a recession mounting, any news that suggests further deterioration in the U.S. economic picture is likely to weigh heavily on stocks.
“If the numbers are not as bad as the market is expecting, we’ll probably begin to see some relief,” said John Praveen, chief investment strategist for Prudential International Investments Advisers LLC in Newark, New Jersey, referring to possible writedowns related to subprime mortgages.
“If the numbers are worse than what the market is looking for, we’ll probably see a big sell-off,” he added.
Citigroup Inc (C.N) and Merrill Lynch & Co Inc MER.N are among financial firms scheduled to report next week, while results are also expected from Wall Street bellwethers General Electric Co (GE.N) and International Business Machines Corp
After three straight weeks of declines, the S&P is down 5.6 percent, its poorest three-week performance since early August. The Dow is down 6.28 percent, the worst such stretch in nearly five years, and the Nasdaq is down 9.4 percent, its worst such run in more than five years.
An extensive U.S. economic agenda also looms next week, with reports due on producer prices, consumer prices, retail sales, housing starts and business inventories.
After Federal Reserve chairman Ben Bernanke’s strong signal on Thursday that the Fed will be very accommodative on interest rates at its next January 29-30 meeting, the consumer price index on Wednesday report takes on even more significance.
A benign CPI number will increase the expectation that the Fed’s rate cut will be 50 basis points, not just 25 basis points, Praveen said. Interest rate futures are already pricing in a half-percentage-point cut.
Both Citigroup, which reports on Tuesday, and Merrill, which reports on Thursday, replaced top leadership last year as they became mired in losses related to subprime mortgages.
The New York Times on Friday reported Merrill is expected to suffer $15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate.
Citigroup is also expected to report a large fourth-quarter loss. Its shares were up on Friday on hopes it was close to securing new outside capital, but the stock has been hit hard by concerns about further writedowns. The largest U.S. bank recorded about $6.8 billion of writedowns in the third quarter and said in November it may face another $11 billion worth.
“Even with a heavy calendar of data, earnings should be the thing that is more in play,” said Brandon Thomas, chief investment officer with Portfolio Management Consultants, a unit of Envestnet Asset Management in Chicago.
In a Reuters poll of economists, producer prices are seen rising 0.2 percent in December after a 3.2 percent jump in November on a spike in energy prices, according to the median forecast.
A rise of 0.2 percent is expected for “core” producer prices, which exclude the volatile food and energy sectors. The producer prices data is due on Tuesday.
Data from the Commerce Department, due on Tuesday, is expected to show retail sales were unchanged in December. The November report showed a stronger-than-expected 1.2 percent increase, but store chains have since reported disappointing activity in the weeks leading up to Christmas.
Wednesday brings November consumer prices, with the median forecasts pointing to a rise of 0.2 percent in both the overall and the core rates.
Also on Wednesday, the Federal Reserve issues the Beige book, a summary of economic conditions in the 12 Federal Reserve districts. The data is prepared for the month-end Fed meeting on rates and will be studied by analysts for more clues about monetary policy.
A key indicator in the new week will be home construction started in December, due to be released on Thursday. The median forecast in the Reuters survey sees a slower 1.14 million unit annual pace, from 1.19 million in November. The report also includes data on building permits.
Other reports in the week ahead includes regional manufacturing data from Federal Reserve banks in New York and Philadelphia.
The IBM earnings are due on Thursday, and GE reports on Friday. Intel Corp (INTC.O), the world’s largest U.S. chipmaker, reports on Tuesday.
According to Reuters Estimates, analysts expect S&P 500 companies’ fourth-quarter earnings to fall 8.4 percent from a year earlier. The latest survey was gloomier than the 6.1 percent decline forecast a week earlier.
Jeff Buetow, chief investment officer of XTF Global Asset Management in New York, is among those concerned about the upcoming crop of earnings, and not just financial companies.
“As the earnings start coming through, people are going to see that things are worse than they thought,” Buetow said.
Buetow sees stocks moving sideways or down over the next three to six months and suggests fixed-income investments as an alternative.
One silver lining noted by Praveen is the recent decline in London interbank offered rates. Those interest rates — widely used as a benchmark in lending — had been stubbornly high, but have been declining following moves by the Federal Reserve and other central banks in response to the credit crunch.
The result of the lower Libor rates is reduced risk of recession, he said.
(For a complete list of the week’s scheduled economic releases, see <ECI/US>)
Additional reporting by Jennifer Coogan; editing by Gary Crosse