Inflation, Job Report Top Stocks' Concerns

Stocks are in the grip of inflation fears now that the Federal Reserve (search) has declared price escalation a real risk, so investors will give next week's reams of economic data -- especially Friday's March employment report -- extra scrutiny.

Wall Street's mantra will be data, data and more data over the next five trading days, the final week of a losing first quarter so far for the major U.S. stock indexes.

On Wednesday, the U.S. government will release the final assessment of the 2004 fourth-quarter gross domestic product.

"You want to see economic news that is good, but not too good," said Alexander Paris, president of Barrington Research in Chicago. "On the economy, sometimes good is good, and sometimes good is bad. Right now, dull is good. They want to see the economy continue to grow, but not too fast."

"The market has been worried about inflation," added Edgar Peters, chief investment officer of PanAgora Asset Management, in Boston. The firm has about $15 billion under management.

"The Fed is saying they are concerned about (inflation) pressures that are starting to build, and they are saying if it continues, they would have to pick up the pace of rate hikes."

Peters said he believes the selling prompted by the Fed's comments on Tuesday about inflation pressures picking up was overdone, positioning the stock market for, at least, a "technical bounce."

DATA FIX

Investors are becoming increasingly attuned to the economic reports in their search for clues about inflation. The obsession grew this week with the Federal Reserve's comments on Tuesday.

The Federal Open Market Committee (search) said "pressures on inflation have picked up in recent months and pricing power is more evident," in its statement released in conjunction with its decision to raise the Fed's benchmark fed funds rate and the discount rate by a quarter point. The rate hike, which was expected, was the Fed's seventh interest-rate increase since last June.

The FOMC's acknowledgement of inflation pressures whipped stock indexes lower and drove the benchmark 10-year U.S. Treasury note's yield up to its highest level since June 2004.

With this, the stock market tanked on Tuesday, dropping the blue-chip Dow Jones industrial average and the broad Standard & Poor's 500 to two-month closing lows and the tech-laced Nasdaq Composite Index to its lowest close since Nov. 2, 2004.

That put the U.S. stock market further into the red for 2005. At the close on Thursday, the last trading day in the holiday-shortened week, the Dow was down 3.2 percent for the year, while the S&P 500 was down 3.3 percent, and the Nasdaq was off 8.5 percent.

Stocks also finished the week lower, with the Dow down 1.8 percent, the S&P 500 off 1.5 percent, and the Nasdaq off 0.8 percent.

U.S. financial markets will be closed on Friday for observance of Good Friday and the start of the long Easter weekend.

Financial markets are fretting now over an increased possibility in the future that the Fed will enact more aggressive interest-rate increases, designed to forestall heated economic growth.

"People are getting worried about excessive strength," Peters said. "If these numbers come in really strong, that would be taken badly. It is a reversal of the previous psychology" that feared economic weakness.

Economists polled by Reuters expect on average fourth-quarter GDP growth of 4 percent, up from 3.8 percent in the previous announcement. The report is due on Wednesday.

As for the crucial March jobs report on Friday, non-farm payrolls are expected to grow by 220,000 and the unemployment rate is seen coming in at 5.3 percent, down from the previous 5.4 percent.

The coming week's full menu of economic data calls for the Conference Board's consumer confidence index on Tuesday, followed by two reports on Thursday that will be closely watched for any sign of pricing pressures on consumers and factories -- the personal income and personal consumption data, plus the PCE Price Index, and the Chicago Purchasing Managers' Index.

On Friday, the University of Michigan will give its final March reading for consumer sentiment. The Institute for Supply Management will release its monthly report on manufacturing, and once again, Wall Street will pay strict attention to the ISM's prices-paid and employment components. Construction spending and monthly car sales also are due that day.

EARNINGS IN FOCUS: CONSUMER COMPANIES

As for the earnings calendar, the pace will be light. Drugstore chain Walgreen Co. will release its results on Monday, followed by Apollo Group Inc., a provider of higher education services designed for working adults, on Tuesday, and two rival consumer electronics retailers, Best Buy Co. Inc.(BBY) and Circuit City Stores (CC) on Wednesday.

In addition to paying attention to the bottom line, of course, investors will stay tuned for any comments from corporate chieftains about how the surge in crude oil and other commodity prices are affecting companies' costs -- and their ability to pass along price increases to their customers.