Focus on Katrina Fallout, Oil Prices

The fallout from Hurricane Katrina (search) and high energy prices may crimp the outlook for company profits next week as investors await data on inflation that could sway the Federal Reserve's next move on interest rates, analysts said Friday.

News on the recovery of U.S. oil rigs and refineries near the hurricane-devastated U.S. Gulf Coast, home to a quarter of total domestic oil and gas production, will also be watched, they said.

Katrina, one of the nation's biggest natural disasters, helped push crude oil prices to a record $70.85 a barrel Aug. 30 on the New York Mercantile Exchange (search). Oil prices have since eased, with October crude settling at $64.08 on Friday.

"Any time you have a situation like this it creates opportunities for companies to clean up their attics, and that means lowering estimates and partly, or completely, attributing it to Katrina," said Anthony Chan, managing director and senior economist, JPMorgan Asset Management.

Michael Sheldon, chief market strategist with New York brokerage Spencer Clarke, said investors want to know which sectors were most affected by rising energy prices and Katrina.

"We're currently in the earnings warning season," he said.

Airlines are among those already affected by higher energy prices, and the slow pace of the U.S. oil industry's recovery after the storm heightened concerns that tight energy supplies might last months.

For the week, the Dow ended up 2.2 percent, its biggest gain in nearly 4 months. The Standard & Poor's 500 ended the week 1.9 percent higher, and Nasdaq advanced 1.6 percent.

The Dow Jones industrial average (search) was up 82.63 points, or 0.78 percent, at 10,678.56 and the S&P 500 Index was up 9.81 points, or 0.80 percent, at 1,241.48. The Nasdaq Composite Index was up 9.48 points, or 0.44 percent, at 2,175.51.

Among the economic reports scheduled for the week ahead are August producer prices on Tuesday, August retail sales on Wednesday and consumer prices and the Philadelphia Fed survey on Thursday.

Market watchers expect most of the data will consist of information gathered before Hurricane Katrina, which will show how well the economy was doing when the storm hit.

It will show "how much momentum did we have going into September," said Lincoln Anderson, managing director and chief investment officer at LPL Financial Services in Boston.

But the data could determine whether the Fed might take a break from raising interest rates. Rate hikes are considered a negative for stocks as they increase borrowing costs for companies and consumers.

"With only a couple of weeks left before the next (Federal Open Market Committee (search)) meeting investors will continue to debate whether the Fed will raise rates at its next meeting and if they don't, are they done," Sheldon said.

Economists polled by Reuters estimated that the CPI rose 0.6 percent in August, with a 0.2 percent rise in the core index, which excludes food and energy prices.

"An upward surprise in the (producer price index and consumer price index) would be bad for stocks. . .but if you get benign readings next week, that gives the Fed the ability to be able to pause if necessary," said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina.

The next meeting of the central bank's policy-setting committee is scheduled for Sept. 20. Policy makers have raised the benchmark lending rate 10 times since June 2004 to 3.5 percent.

Some earnings reports will also be watched next week, including results Companies expected to report results next week include Campbell Soup (CPB), Best Buy Co. Inc. (BBY) and Bear Stearns Cos. (BSC).