Stocks Face Specter of Inflation, Higher Rates

Stocks could show some weakness when markets reopen Tuesday as earnings season winds down, while inflation and interest-rate worries stoke investors' concerns about future profits.

Oil prices around $48 a barrel could also keep up the pressure on the markets, strategists said.

Markets were closed Monday in observance of the Presidents Day holiday.

Retailers Home Depot Inc. (HD), Gap Inc. (GPS), J.C. Penney Co. Inc. (JCP) and Limited Brands Inc. (LTD) are scheduled to report their quarterly results in the coming week as the curtain drops on the earnings season.

The Consumer Price Index (search) for January, which will give a reading on inflation at the retail price level, will be closely watched next week.

On Friday, the government reported that the core Producer Price Index shot up 0.8 percent in January. That increase — the biggest gain since December 1998 and well above the Street's expectation for a 0.2 percent rise — fanned inflation fears and bolstered a growing expectation that the Federal Reserve (search) will keep raising interest rates well into 2005.

The PPI report came on the heels of Federal Reserve Chairman Alan Greenspan's (search) remarks this week to Congress that interest rates were still "fairly low," a signal that they will keep rising.

"The CPI report Wednesday will be important as investors will be looking to see if the jump in producer prices will translate into a rise in consumer prices," said Michael Sheldon, chief market strategist at brokerage Spencer Clarke.

"If that happens, it will be a negative for the stock market as it will signal that the Fed will have to get more aggressive in raising rates to combat inflation," he added. "Further, higher prices in general and higher interest rates will weigh on consumer spending."

Both the overall CPI and the core CPI, excluding volatile food and energy prices, are expected to have risen 0.2 percent in January, according to economists polled by Reuters.

"I see a weak market as investors digest the earnings news, Greenspan's testimony and the producer prices data, which is clearly inflationary," said Tim Ghriskey, chief investment officer of Solaris Asset Management.

Inflation pressures, higher interest rates and high oil prices will not only hurt consumer spending, but will also raise the cost of doing business, strategists said. That spells bad news for corporate profits, already headed for a slowdown in 2005, they noted.

Other economic data on the week's calendar include the consumer confidence index for February from the Conference Board (search) Tuesday and durable goods orders for January Thursday. Weekly oil inventory data and jobless claims figures will also get attention.

"There is a clear danger from energy prices, which have been moving back up again," said Joseph Battipaglia, chief investment officer for Ryan, Beck & Co. "Any suggestion that oil inventories are being drawn down or there are potential supply disruptions will show up right away in the oil market going up and the stock market going down."

Stocks fell last week. The blue-chip Dow Jones industrial average ended down 0.1 percent. The Standard & Poor's 500 index finished the week down 0.3 percent for the week and the Nasdaq ended down 0.9 percent.

On the New York Mercantile Exchange (search), crude oil for March delivery settled at $48.35 a barrel Friday. Oil prices are lower than crude's record high of $55.27 a barrel last October, but are still up about 12 percent so far this year.