Source: The Canadian Press

Investors will be looking to the U.S. Federal Reserve’s meeting on interest rates this week to get a clearer picture on how the American economic recovery is unfolding.

There isn’t any doubt about what the Fed will do about rates themselves — the central bank is fully expected to keep its key rate down at a record low of 0.25%.

Certainly, there was nothing in last Friday’s U.S. non-farm payrolls report to suggest that the American economy is ready for higher rates. While the jobless rate held steady at 9.5%, the economy couldn’t even meet modest expectations of 90,000 new private sector jobs last month. Instead, the sector added about 70,000 jobs.

But the Fed can find solace from some areas of the report.

“There are positive sinews out there, especially on the auto side where we see demand rising, which kind of goes against the grain here,” said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.

While jobs numbers have been weak, “if the consumer is shell shocked from what happened to portfolios in the second quarter, why on earth would (he) be optimistic about the outlook for auto demand? Yet that’s what we’re seeing and that’s one of the reasons we saw manufacturing employment up in the month of July.”

So with no doubt about rates, investors will be eager to scan the Fed’s accompanying communique for its take on economic conditions. They will also look to see if the Fed is considering extra stimulus to jolt the economy, particularly in light of rising worries about deflation.

Late in July, James Bullard, president of the Federal Reserve Bank of St. Louis, said the Fed should revive a crisis-era program to buy government debt if the country seems headed toward a bout with deflation.

Fed chairman Ben Bernanke has yet to endorse precise steps, only saying that the Fed is ready to act if needed.

“On the fiscal stimulus side, it doesn’t seem like (the U.S.) Congress has any appetite to pony up to another trillion dollars worth of fiscal stimulus, so the question is, will we get it from the Fed?” said Paul Taylor, chief investment officer BMO Harris Private Banking.

“The market will be listening for the tone of Bernanke’s comments to see whether in fact there is the possibility that he would consider more steps to stimulate the economy if we get some further weak economic data.”

Pyle also said that the Fed could provide some reassurance to markets by presenting a united front at this meeting.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, at the June meeting dissented from the Fed’s pledge to keep rates at ultra-low levels for an extended period. It was the fourth consecutive meeting where he objected to that pledge.

Among other things, Hoenig fears keeping rates too low for too long could lead to excessive risk-taking by investors and feed new speculative bubbles in the prices of stocks, bonds and commodities.

“It will be interesting to see if that dissent disappears next week,” said Pyle.

“And that in itself could be significant for the markets if that happens and would suggest that the Fed has a consensus now to act if necessary. If we see that dissent disappear, equity markets may actually get a boost from that, thinking that the Fed is actually serious and will act if necessary, that there is no dissent towards maintaining a low interest-rate environment.”

Beyond the Fed meeting, the other major piece of economic data will be U.S. retail sales at the end of the week.

Meanwhile, investors will have plenty of second-quarter earnings reports to chew over this week.

“It’s been a stellar second quarter, and these are on pretty lofty expectations,” added Taylor, noting that improved revenue has been key.

“Because, while we saw stronger earnings earlier in the year, it was through expense management. So with expenses having been contained or even managed lower, any sort of modest revenue lift and you get a meaningful expansion in the margins. You get the kind of earnings growth that we have seen.”

The biggest Canadian earnings disappointment so far has been Manulife Financial (TSX:MFC). Its stock lost about 14% last week after handing in a surprise second quarter loss of $2.4 billion.

This week, investors will take in results from CI Financial (TSX:CIX) and First Quantum Minerals (TSX:FM) on Tuesday. Toymaker Mega Brands (TSX:MB) hands in earnings on Wednesday.

Thursday is the heaviest earnings day with reports from the likes of coffee chain Tim Hortons (TSX:THI), Equinox Mines (TSX:EQN), Canadian Tire (TSX:CTC.A) and Quadra FXN Mining (TSX:QUX).

Uranium miner Cameco (TSX:CCO) reports its quarterly results on Friday.

The TSX ended last week up 86.54 points or 0.73% while the Dow industrials gained 187.62 points or 1.79% despite the poor jobs report on strong earnings reports and economic data showing continued expansion in the manufacturing and service sectors.