Interest Rates, Positive Earnings Results Key to Stocks Rally

U.S. stocks may rally this week if the early stages of the earnings season yield positive results and U.S. data shows price pressures are moderating enough to keep interest rates steady.

Tech bellwether Intel Corp. (INTC), financial powerhouse Citigroup Inc. (C) and last week's headline-grabber Apple Inc. (AAPL) all report this week and should offer insight into how the corporate sector fared in the final stages of 2006, when economic growth was slowing.

"It's going to be an action-packed week and certainly earnings are at the top of the list," said Hugh Johnson, chief investment officer of Johnson Illington Advisors, in Albany, New York.

"As long as there are no big earnings shocks, as long as earnings come in better than forecast, I think the stock market will edge its way higher," he said.

U.S. stocks rose for a third day Friday, ending the week up as energy shares rebounded with oil prices and data showing surprisingly robust December retail sales underscored optimism about economic growth.

The Dow Jones industrial average rose 41.10 points, or 0.33 percent, to end at 12,556.08. The Standard & Poor's 500 Index was up 6.91 points, or 0.49 percent, at 1,430.73. The Nasdaq Composite Index was up 17.97 points, or 0.72 percent, at 2,502.82.

For the week, the Dow rose 1.3 percent, the S&P 500 gained 1.5 percent and the Nasdaq advanced 2.8 percent.

Inflation Data in Focus

The economic data calendar this week boasts two reads on inflation at the wholesale and consumer levels, which should give the market more guidance on when the U.S. Federal Reserve is likely to cut interest rates as growth moderates and price pressures ease.

The core Producer Price Index, which strips out volatile food and energy prices, is expected to have accelerated at a 0.1 percent rate in December, versus November's 1.3 percent rise.

The core Consumer Price Index is forecast to have risen at a 0.2 percent rate, compared with 0.1 percent in November, leaving the year-on-year rate at 2.6 percent, compared with November's 2.7 percent.

"From the economic perspective, because the Fed has been talking about inflation so much, CPI and PPI are probably taking on a little more importance than they have probably in the past," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale Illinois.

The stock market will probably weather any unexpected pick-ups in price pressures in these two inflation gauges, especially after a near 7 percent fall in the price of crude oil to 18-month lows below $55 a barrel in the recent weeks.

Intel, the world's top chipmaker, reports on Tuesday and should offer a flavor of how the technology sector has fared at a time when some tech stocks have been punished, especially if it delivers an upbeat outlook for the industry.

Shares of rival chip maker Advanced Micro Devices fell more than 9 percent on Thursday, a day after it issued a warning on its fourth-quarter revenue and earnings.

"On the back of the AMD earnings, it will be good to see Intel to get a better read on the health of the semiconductor industry," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey.

Also on the tech front, Apple will release its quarterly earnings on Wednesday. Apple shares hit an all-time high of $97.80 last week after the company unveiled its eagerly anticipated iPhone mobile phone, prompting analysts to raise their share price and earnings targets.

The world's second largest cell phone maker, Motorola Inc., will also release earnings. The company in recent weeks issued a profit warning, which some believed was the result of fierce price competition between Motorola and its larger rival Nokia.

Along with Citigroup, some of Wall Street's biggest banks will deliver earnings this week, including Merrill Lynch and JP Morgan Chase & Co.

"It will be interesting to gauge at least how the banking environment is in light of housing and in light of some of the lending conditions," said Hinsdale's Nolte.

Other economic data include the Philadelphia Fed's index of business conditions in the Mid-Atlantic and the University of Michigan's preliminary read on consumer sentiment.