Wall Street Resumes Inflation Watch

NEW YORK – Wall Street resumes its inflation watch next week with key gauges on producer and consumer prices set for release.

Stock investors also may start making a holiday checklist next week when U.S. retailers will round out the third-quarter earnings season as they report results and discuss the outlook for Christmas sales.

With congressional elections out of the way, analysts say there is reason to be optimistic about the coming holiday shopping season.

"The fall in gas prices has psychologically been better for people and the unemployment rate is very low, so there are people out there who can spend," said Scott Vergin, portfolio manager at Thrivent Financial in Minneapolis.

"Plus, with Rumsfeld out, there's hope things will change for the better with the war and that may help sentiment during the Christmas season," he added, referring to U.S. Secretary of Defense Donald Rumsfeld's resignation Wednesday, a day after the Democrats' big election victory.

Rumsfeld said he quit because the political climate changed after the Democrats' win, which was driven by anger over the Iraq war.

The Democratic sweep of Congress in Tuesday's midterm elections prompted some investors to worry that it would bring about a wave of legislation unfriendly to various business sectors.

Still, stocks achieved their best weekly performance in a month.

"A tone will come out of Washington of cooperation or friction. In some parts, friction and gridlock is favorable to the markets — don't make any new laws and let's have a stable environment," said Robert Lutts, chief investment officer of Cabot Money Management in Salem, Massachusetts.

On Friday, stocks ended the week higher. The blue-chip Dow Jones industrial average finished the week up 1.02 percent at 12,108.43, while the S&P 500 advanced 1.22 percent for the week to close Friday at 1,380.90.

The Nasdaq gave its best performance in two months, with a weekly gain of 2.53 percent. It ended Friday at 2,389.72.

Fred Dickson, director of retail research at D.A. Davidson & Co. in Lake Oswego, Oregon, said he believes the October readings on the U.S. Producer Price Index and the Consumer Price Index will be fairly benign.

"I don't think we'll get any big surprises in inflation," Dickson said. "We'll probably continue in a trading range environment, with the Dow holding in the 12,000 level, maybe even a little higher."

PPI, FED MINUTES AND CPI

Next week's economic calendar heats up on Tuesday, with the Labor Department's October report on the Producer Price Index. That will be followed on Wednesday with the release of the minutes from the Federal Open Market Committee's most recent policy meeting on Oct. 24-Oct. 25, when it held its benchmark fed funds rate steady at 5.25 percent for the third consecutive time. And on Thursday, the Labor Department will release the October Consumer Price Index.

Brett Gallagher, deputy chief investment officer with Julius Baer in New York, said, "The rally since the summer has been built on the change in perception that the Fed may not have to continue raising rates, and in fact after a period of pause, (it) may be getting ready to lower rates.

"That drove the market and that can only happen if inflation remains in check, so I think the inflation numbers are the biggest factor," Gallagher said.

Economists polled by Reuters expect the overall PPI to decline 0.5 percent in October, after a drop of 1.3 percent in September. Excluding volatile food and energy prices, the forecast calls for core PPI to rise 0.1 percent in October, following a 0.6 percent gain in September.

"Due to the fact oil and gasoline prices have come down, we'll probably see the headline numbers on both PPI and CPI come down," said Dickson of D.A. Davidson & Co. "The core CPI number will be up in the 0.2 (percent) or 0.3 (percent) range, flat versus a month ago, and equity investors will look at that and see inflation on a moderating course and earnings will drive the market."

Overall October CPI is forecast to drop 0.3 percent, following September's 0.5 percent decline, according to the Reuters poll. Core CPI is pegged at an October gain of 0.2 percent, matching September's rise of 0.2 percent.

U.S. crude oil for December delivery settled Friday at $59.59 a barrel, down $1.57 on the New York Mercantile Exchange. For the week, NYMEX December crude was up only 45 cents. Since peaking at $78.40 a barrel in July, the leading NYMEX crude futures price has fallen 24 percent.

On Friday, October housing starts and building permits are due, with economists expecting declines in both.

RETAIL'S SUPER TUESDAY

Tuesday's earnings calendar is dominated by retailers. On tap are No. 1 home improvement chain Home Depot Inc. (HD) which has suffered amid a housing slowdown; office supplies seller Staples Inc. (SPLS) and discount chains Target Corp. (TGT), TJX Co. Inc. (TJX) and Wal-Mart Stores Inc.(WMT)

Amid the rush of retail earnings, the Commerce Department will report October retail sales Tuesday. Economists polled by Reuters see overall October sales down 0.4 percent; excluding autos, October sales are forecast down 0.2 percent.

Wednesday brings results from Victoria's Secret operator Limited Brands Inc.. On Thursday, quarterly scorecards are due from closeout retailer Big Lots Inc.(BIG), as well as from Gap Inc.(GPS), operator of the Old Navy, Gap and Banana Republic chains; coffeehouse chain Starbucks Corp. (SBUX) and Sears Holding Corp. (SHLD)

TAKING TECH'S TEMPERATURE

Besides retailers, a handful of tech companies are scheduled to report earnings next week. Among them, electronics testing and measurement equipment maker Agilent Technologies Inc. (A) and chip maker Analog Devices Inc. (ADI) will release results Tuesday. Applied Materials Inc.(AMAT), a manufacturer of microchip-making equipment, and data storage provider Network Appliance Inc. (NTAP) are set to report earnings Wednesday.

On Thursday, tax preparation software maker Intuit Inc. and computer and printer maker Hewlett-Packard Co. (HPQ) will give their quarterly updates.