Investors on Alert for Inflation, Rate Hikes

Stock bulls will push for a third week of gains after last week's slide in oil below $60 a barrel, but investors will be on the alert for signs of inflation and higher interest rates.

The holiday-shortened week will include a rush of earnings from retailers, including Wal-Mart Stores Inc. (WMT), which will grab investors' attention. The reports will put the finishing touches on the fourth-quarter corporate profit picture, which analysts said has improved since January when some high-profile companies disappointed Wall Street.

Minutes Tuesday from the Federal Reserve's last policy-setting meeting and consumer price data Wednesday will be picked apart for further clues about the interest-rate outlook. Investors are worried signs of rising inflation will force the Fed to keep extending its long campaign of raising interest rates. The Fed has been tightening credit since June 2004 in an attempt to rein in inflation.

New Fed Chairman Ben Bernanke, in congressional testimony this week, suggested that more rate increases may be needed to contain inflation. But analysts said his reassuring comments on the economy and the absence of any big surprises in his remarks helped push stocks higher this week.

"His testimony not only played well to Congress but to Wall Street. So we should continue to get a little honeymoon spillover from that," said Fred Dickson, senior vice president and market strategist at D.A. Davidson & Co. in Montana.

In another positive sign for higher stock prices, crude oil this week fell below $60 for the first time this year. U.S. crude for March delivery was still below that level on Friday; it settled at $59.88 a barrel, up $1.42 on the New York Mercantile Exchange.

"I think investors are going to go into next week feeling a little bit better about the shape of consumer spending and feeling much better about the emergence of Bernanke as he heads the Fed," Dickson said.

On Friday, all three major U.S. stock indexes finished the week with gains. The blue-chip Dow Jones industrial average rose 1.8 percent, while the broad S&P 500 advanced 1.6 percent, and the Nasdaq Composite Index gained 0.9 percent.

Oil's Drop Below $60

Forecasts of higher U.S. crude and gasoline inventories triggered the fall in oil to below $60 on Tuesday. On Wednesday, when a larger-than-expected rise in crude stockpiles was reported by the government, oil fell below $58 for the first time since Dec. 28.

Lower energy prices tend to boost stocks because they mean reduced costs for consumers and corporations.

But analysts said continued tensions between the Western powers and Iran over Iran's nuclear ambitions, as well as fighting in Nigeria, the eighth-largest crude exporter, between government forces and militants, could keep oil prices higher. Crude hit an all-time high of $70.85 in late August after Hurricane Katrina struck the U.S. Gulf Coast.

"We don't think $60 is sustainable. We just had the warmest January in 100 years, but we're expecting colder temperatures in New York this weekend. Investors are being very short-sighted," said Philip Orlando, senior portfolio manager at Federated Investors.

"We're sitting on a geopolitical powder keg with Iran that could blow at any moment. It would not surprise us to see crude back in the $70-plus neighborhood by the end of the quarter."

Fed Minutes, CPI and Durable Goods

The financial markets will be closed for the Presidents Day holiday Monday.

But Wall Street will reopen Tuesday anxiously awaiting the release of minutes from the Federal Open Market Committee meeting on Jan. 31 — Alan Greenspan's last.

In the week ahead, the FOMC news will be followed Wednesday by the consumer price index and Friday by durable goods orders. Both reports, which will be for January's data, will provide more information on the U.S. economy's health.

"The market is hypersensitive to any clues that they can get as to what the Fed will do over the course of tightening cycle. The market is very focused on these data points," Orlando said.

On Friday, a report from Labor Department showing the core Producer Price Index, excluding volatile food and energy prices, climbed 0.4 percent in January — twice market expectations — was a negative influence for stocks.

Economists polled by Reuters expect the overall CPI for January to rise 0.5 percent, after a drop of 0.1 percent the previous month. They see core CPI, excluding volatile food and energy prices, up 0.2 percent in January, following December's gain of just 0.1 percent.

Orders for durable goods, which are manufactured goods like washing machines, computers and cars designed to last three years or more, are expected to drop 1.0 percent in January, according to the Reuters poll. In December, durable goods orders rose 1.8 percent. Excluding transportation, January durable goods orders are forecast to rise 0.5 percent, compared with December's gain of 1.7 percent.

From Wal-Mart to Nordstrom

Earnings will be on the watch list, too.

In the week ahead, investors will get more insight into consumer spending when earnings come in from retailers ranging from discounters to purveyors of luxury goods.

Quarterly earnings are due Tuesday from Wal-Mart, the discount behemoth and the world's largest retailer, as well as from Federated Department Stores Inc., the parent of Macy's and Bloomingdale's, and Home Depot Inc., the world's largest home improvement retailer.

On Thursday, quarterly results are expected from Gap Inc., the largest specialty apparel chain; Nordstrom Inc., an upscale department store chain known for service and designer clothes; Kohl's Corp., a moderately priced department store chain, and Limited Brands Inc., owner of Victoria's Secret and Bath & Bodyworks stores.

They follow higher profits reported this week by J.C. Penney Co. Inc. (JCP) and Target Corp. (TGT), which were boosted by strong holiday season sales. The fourth quarter generates the biggest portion of retailers' annual profit.

"Good news on retailers should be a sigh of relief," Dickson said.