Investors to Watch Inflation

Wall Street will examine U.S. inflation data this week for any signal that an end to Federal Reserve interest-rate increases is in sight, and if it likes what it sees, stocks could climb to five-year highs.

Investors were cheered last week by a consumer prices report that showed tame inflation and bought up sectors sensitive to higher-interest rates like financial and home building stocks.

Tuesday's producer prices index report could solidify the notion that inflation is well under control, leaving the Fed to taper off its rate increases in the first half of the year, analysts said.

The Labor Department is expected to report that the overall PPI declined 0.1 percent last month, while the core PPI, which excludes food and energy, rose 0.2 percent, according to economists surveyed by Reuters.

"A 0.2 percent or 0.1 percent gain in the core PPI would be fine," said Richard Sichel, who oversees $1.5 billion as chief investment officer of Philadelphia Trust Co. "That would suggest the Fed will be able to pause after the May 10 meeting."

The market's performance may also hinge on existing home sales data on Thursday and new home sales figures on Friday. Both reports are forecast to show a slight slowdown, according to Reuters polls.

"Investors have become completely convinced that we need to see the housing canary buckle under a little bit," said Anthony Chan, chief economist at JPMorgan Private Client Services. "If the housing market softens, then investors will view that as the canary in the cave that indicates that central bankers will not have to be as aggressive."

The Fed has been raising borrowing costs by a quarter-percentage point since June 2004, bringing the benchmark U.S. rate to its current 4.5 percent. Policy-makers next meet on March 27-28. Wall Street economists polled by Reuters see the fed funds rate peaking between 5 percent and 5.5 percent.

The Dow registered its best weekly gains in nearly a month last week, while the S&P and Nasdaq had their best weekly performances since January.

The Dow Jones industrial average ended up 26.41 points, or 0.23 percent, at 11,279.65 on Friday. The Standard & Poor's 500 Index gained 1.92 points, or 0.15 percent, to 1,307.25. The Nasdaq Composite Index was up 6.92 points, or 0.30 percent, at 2,306.48.

For the week, the Dow rose 1.84 percent, the Nasdaq gained 1.96 percent and the S&P 500 advanced 2 percent.

"Can the market hold onto those gains next week? If we see those inflation numbers with no major surprises, I think the market can hold the gains and move somewhat higher," Sichel said.

Investors will also try to gauge the outlook for interest rates when Fed Chairman Ben Bernanke and Federal Reserve Bank of San Francisco President Janet Yellen speak at separate events on Monday.

In corporate news, a few tech companies are slated to report earnings. Software company Oracle Corp. will announce results on Monday, while software maker Adobe Systems Inc. and contract electronics manufacturer Jabil Circuit Inc. are set to report on Wednesday.

Other high-profile names on the earnings calendar include Nike Inc., the world's largest athletic shoe company, on Tuesday, Morgan Stanley, the No. 2 U.S. investment bank, on Wednesday, and General Mills Inc., the second-biggest breakfast cereal maker, on Thursday.

Morgan Stanley will have to live up to high expectations after rival Goldman Sachs Group Inc. posted a 62 percent surge in profits that easily blasted past Wall Street forecasts. Lehman Brothers Holdings Inc. and Bear Stearns Cos. Inc. also reported higher-than-expected earnings.

"Within financials, the Goldman Sachs earnings were so powerful, we're still talking about them," said Richard Skaggs, senior vice president and portfolio manager at Loomis Sayles, in Boston. "Our expectations are for a more muted reaction to Morgan Stanley."

Other signs on earnings health may trickle in this week as companies make unscheduled corporate updates. On Tuesday railroad operator Union Pacific Corp. raised its first-quarter and full-year earnings projection, sending railroad shares up sharply. Diversified manufacturer Illinois Tool Works Inc. on Wednesday also lifted its outlook.

"We're moving into pre-announcement season and the few we've seen so far, such as Union-Pacific and Illinois Tool Works, plus the tone of business coming from Emerson Electric and Caterpillar lead us to believe the industrials look like they could be a sector with good news," Skaggs said.

Other U.S. economic indicators on tap for this week include February leading indicators on Monday, weekly chain-store sales on Tuesday, weekly mortgage applications on Wednesday, weekly jobless claims on Thursday and February durable goods orders on Friday.