NEW YORK – This week could be make-or-break time for Wall Street's push to recover from the market's slide in late February, with earnings due from bellwethers such as Citigroup Inc. and the release of the Consumer Price Index.
Outlooks accompanying this week's results will be crucial because investors are eager to determine the extent of the fallout from the housing slowdown and the wave of delinquencies and foreclosures in the subprime mortgage market.
On Tuesday, the Street will get three economic reports for March that will merit close scrutiny for clues on inflation and the economy's health: the U.S. Consumer Price Index, housing starts and industrial production. March retail sales are due Monday.
"Any bit of good news on inflation is OK, but one bit of bad news on inflation is very damaging," said Charles Lieberman, chief investment officer of Advisors Capital Management, LLC in Paramus, New Jersey.
"If the inflation news isn't particularly significant, it'll be more of an earnings-driven environment."
Chip maker Intel Corp. and beverage company Coca-Cola Co., both components of the Dow Jones industrial average , are among the marquee names on this week's earnings calendar.
Last week, the world's largest aluminum company, Alcoa Inc., and diversified conglomerate General Electric Co. kicked off the earnings season on a higher note, with both companies reporting a rise in quarterly profits.
The benchmark Standard & Poor's 500 index consolidated its recovery back to levels it held just before the Feb. 27 sell-off that rattled global equity markets.
For the week, all three major U.S. stock indexes rose: The blue-chip Dow Jones industrial average added 0.41 percent, the broad S&P 500 gained 0.63 percent and the tech-driven Nasdaq Composite Index rose 0.83 percent.
Tuning In to the Outlooks
Investors tend to look ahead, so they will pay special attention to this week's statements on profit outlooks. These comments will give a glimpse of how corporate America sees the economy faring as the housing market falters and subprime mortgage defaults rise.
If upbeat outlooks and stronger-than-expected quarterly earnings dominate this week's headlines, then analysts expect stocks to push ahead with their recovery. The U.S. stock market has broken away from its mid-March lows that followed the Feb. 27 sell-off, which was triggered by a drop of almost 9 percent in China's main share index.
A flurry of deal news also could lend support.
"Expectations are pretty muted right now for first-quarter earnings, so I'm pretty confident companies will be able to beat those expectations," said Giri Cherukuri, head trader at OakBrook Investments LLC, in Lisle, Illinois.
"Earnings will generally be a positive since expectations are relatively low."
The outlook for U.S. earnings growth for Standard & Poor's 500 companies has been scaled back in the past couple of weeks to a gain of 5.0 percent compared with a year ago from an increase of 9.2 percent estimated when the quarter began, according to Reuters Estimates.
Other notable names on this week's earnings calendar are Internet media company Yahoo Inc.; Web auctioneer eBay Inc.; JP Morgan Chase & Co. , the third-largest U.S. bank; International Business Machines Corp., the world's largest computer services company; Motorola Inc. , the No. 2 cell-phone maker, and United Technologies Corp. , a diversified manufacturer.
Drawing a Bead on Inflation
Besides worrying about economic growth, investors are becoming increasingly concerned about the menace of inflation. Last week, the Federal Reserve indicated that further interest-rate increases may be needed to curb inflation.
Until recently, investors had been betting that the Fed would want to forestall a further slowdown in growth by cutting interest rates sometime this year, perhaps as soon as this summer. However, minutes from the Fed's most recent policy meeting showed that the central bank's top officials were more worried about inflationary pressures.
As a result, Tuesday's CPI report is most likely to be the determining factor of whether Wall Street sustains its uptrend or reverses course this week, according to analysts.
"If economic reports show us staying in a non-recessionary environment and inflation likely to moderate, those forces would hold the market up," said Steve Goldman, market strategist at Weeden & Co., in Greenwich, Connecticut.
The Labor Department's overall Consumer Price Index is forecast to gain 0.6 percent in March, after rising 0.4 percent in February, according to economists polled by Reuters.
The closely watched core CPI, which excludes volatile food and energy prices, was expected to rise 0.2 percent in March, matching February's gain.
On the housing front, more signs of a slowdown are expected when Tuesday's report is released. Housing starts for March are forecast to fall to a seasonally adjusted annualized rate of 1.495 million units from a rate of 1.525 million in February, according to the Reuters poll. Building permits are likely to slip to an annual rate of 1.510 million in March from 1.532 million in February.
Industrial production is forecast up 0.1 percent in March, while capacity utilization is pegged at 81.9 percent, the Reuters poll showed. The Federal Reserve's report is set for Tuesday. In February, industrial production jumped 1.0 percent and the capacity utilization rate was 82 percent.
March retail sales, due Monday, are expected up 0.6 percent overall and excluding autos, up 0.9 percent, the Reuters poll showed.