By Sue Chang, MarketWatch

Yellen hints at summer rate hike

Memorial Day marks the unofficial beginning of summer, but baseball and barbecues may have to take a back seat to Fed watching for a while longer for investors who remain preoccupied with the timing of the Federal Reserve's next rate increase.

The nonfarm payrolls report, a closely watched barometer of growth, is likely to provide an important clue given the increasingly hawkish tone of Fed officials with even Chairwoman Janet Yellen embracing the possibility of higher rates.

"Strong jobs data is a sign that the economy is doing better and that the chance of a rate hike is increasing," said Karyn Cavanaugh, senior market strategist at Voya Financial.

That said, economists surveyed by MarketWatch are projecting the economy to have created 158,000 new jobs in May, slightly below the 160,000 reported in April. The Labor Department will release May jobs data on Friday morning.

"We think May payrolls could be weak and if we're right, this would likely spark concern about the domestic outlook and foil the Fed's hopes for a midyear hike," Paul Mortimer-Lee, chief economist for North America at BNP Paribas, said in a note.

Mortimer-Lee expects payrolls to come in around 110,000 in May.

"The Fed thinks first quarter's growth setback was just temporary; payrolls as low as our forecast would seriously challenge that view," he said.

The U.S. economy grew at an 0.8% annualized pace (http://www.marketwatch.com/story/first-quarter-us-gdp-raised-to-08-2016-05-27) in the first quarter, slowing from a 1.4% expansion in the fourth quarter.

Consumer spending and core inflation data, both due on Tuesday, could also move the stock market if they point to building inflationary pressure, something the Fed won't be able to ignore.

The S&P 500 climbed 8.96 points, or 0.4%, to close at 2,099.06 on Friday for a weekly advance of 2.3%. The Dow Jones Industrial Average rose 44.93 points, or 0.3%, to finish at 17,873.22, up 2.1% for the week. The Nasdaq Composite added 31.74 points, or 0.7%, to close at 4,933.50, posting a weekly gain of 3.4%.

See:S&P 500 posts biggest weekly gain in 2 months (http://www.marketwatch.com/story/caution-puts-lid-on-us-stock-futures-ahead-of-yellen-speech-2016-05-27)

Fed Watch

Yellen surprised market participants on Friday by suggesting that a decision to tighten the monetary policy is possible this summer (http://blogs.marketwatch.com/capitolreport/2016/05/27/live-blog-and-video-of-janet-yellen-interview/).

"It's appropriate--and I have said this it the past--for the Fed to gradually and cautiously increase our overnight interest rate over time--and probably in the coming months such a move would be appropriate," she said in a discussion with Harvard Professor Gregory Mankiw after receiving an award from the university's Radcliffe Institute for Advanced Study.

The stock market will have a further idea of how determined the Fed is to act when another dove, Gov. Lael Brainard, speaks on Friday.

Technical Analysis

Katie Stockton, chief technical strategist at BTIG, believes the market doesn't have much energy to digest the selling pressure that is expected to emerge soon in the wake of the recent rally.

"While short-term momentum has improved, we do not think it will be enough to generate a decisive breakout above resistance near 2,090-2,100," she said in a note.

In the longer term, there is more upside potential with stocks having bottomed in February when the S&P 500 was on a three-month losing streak, according to Jeffrey Saut, chief investment strategist, at Raymond James.

"I think the real surprise for everyone would be to see the S&P 500 pop to a new all-time high, suggesting a price target of 2,300 for the S&P 500," he said.

Earnings

There will be very little earnings-related action with only Michael Kors Holdings (KORS) and Broadcom Ltd. (AVGO) slated to announce results.

With 98% of S&P 500 components having reported so far, first-quarter earnings fell 6.7%, marking four straight quarters of year-over-year contraction in profits, according to FactSet.

Crude Oil

The Organization of the Petroleum Exporting Countries will meet on Thursday in Vienna (http://www.marketwatch.com/story/what-50-oil-means-to-producers-and-the-fed-2016-05-27) although no dramatic announcement on a production cut is expected.

Still, investors will closely watch for any OPEC developments that could potentially drive oil prices higher which the Fed will view as a sign that the economic recovery remains on track.

Oil prices briefly touched $50 during the week but July WTI crude fell 15 cents, or 0.3%, to.settle at $49.33 a barrel on Friday.

 

(END) Dow Jones Newswires

May 28, 2016 08:01 ET (12:01 GMT)

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