Markets to Focus on Inflation Data

Stock investors will pore over reports on consumer and manufacturing pricing next week, searching for signs of inflation and hints about when the Federal Reserve (search) will reconsider its policy of steady interest rate hikes.

Lately, gains in the stock market have been linked to the idea that the Fed is nearly finished with its pledge to raise interest rates at a measured pace.

Since the last tightening cycle began last June, rates have been hiked eight times, but some think the cycle has run its course and the Fed will reassess its policy.

The Producer Price Index (search) for May is due on Tuesday and the Consumer Price Index (search) for May is due on Wednesday, both at 8:30 a.m.

"The CPI and PPI numbers will certainly be closely, closely watched, because if there's any hint of a negative surprise in them, it certainly raises the specter of the Fed not only raising rates in June, but raising them again in August," Wendell Perkins, chief investment officer of the Johnson Family of Funds, said.

"There's a hope, I think, that maybe June is the rate increase for a while, although I don't think so," he said.

If either report shows signs of inflation, the market may be roiled, analysts and traders said. Wall Street analysts on average are looking for both the PPI and CPI indexes to show a gain of 0.2 percent, excluding volatile food and energy costs.

"If there are surprises to the upside in the numbers then that could change things dramatically," said Jay Finkel, senior equity trader at Lord Abbett.

This week, the Dow rose 0.49 percent and the S&P edged up 0.17 percent but Nasdaq dipped 0.41 percent.

The next meeting of the interest rate-setting Federal Open Market Committee (search) is on June 29 and 30.

Apart from the inflation data, the week is packed with economic data, which will be scoured for signs that the U.S. is still "on firm footing," as Federal Reserve Chairman Alan Greenspan (search) described it earlier this week.

Key reports include the release of May retail sales on Tuesday and the Federal Reserve's Beige Book, an anecdotal report on regional economic, and the Federal Reserve Bank of New York issues its June Empire State Manufacturing Survey on Wednesday.

On Thursday investors can expect a regional manufacturing outlook from the Philadelphia Federal Reserve and May housing starts. For Friday, the first-quarter Current Account Balance is due and also a read on consumer sentiment from the University of Michigan.

"People will be looking at the retail sales number closely, that's always an important one," Anthony Chan, senior economist at J.P. Morgan Asset Management, said. "The report will give the market some idea on whether the growth story is still holding on."

Investors can also expect quarterly earnings from big-name financial companies Lehman Brothers Holdings Inc. (LEH), Bear Stearns Companies (BSC) and Goldman Sachs Group Inc. (GS).

The Johnson Family of Funds' Perkins, who has $1.1 billion under management and owns Bear Stearns shares, said investors should be cautious.

"The company itself (Bear Stearns) has certainly been doing well, but the fixed income part of their business is going to be challenging," Perkins said. "So I don't think expectations are particularly high for this coming quarter.

"It will certainly be interesting to see what Bear and Lehman have to say because I think there are some fears out there that the numbers might not be that attractive," he added.

Earnings for consumer companies Best Buy Co. Inc. (BBY), Circuit City Stores Inc. (CC) and Yum Brands Inc. (YUM) are also due next week.