Investors Hold Out for More Inflation Data

With Wall Street sorely in need of a jump-start following a rocky beginning to June, investors will latch onto this week's inflation data to gauge if the Federal Reserve can be dissuaded from raising interest rates again this month, as many fear.

The latest reports on May producer and consumer prices take on added significance after a slew of Fed officials, including Chairman Ben Bernanke, inundated investors with tough talk on price pressures last week.

This week also features a heavy roster of Fed speakers, who could yet give more warnings on inflation.

Perhaps one of the starkest warnings in recent days came from Federal Reserve Board Governor Susan Bies, who said last week that core inflation in the last three quarters has been running in the high 2-percent range, "which personally makes me very uncomfortable."

The chances for a 17th consecutive rise in the federal funds rate — now at 5 percent — after the Fed's June 28-29 policy-setting meeting currently are seen at around 80 percent, up from about 68 percent before the release of a weaker-than-expected U.S. May jobs report on June 2.

Bernanke at Crossroads

"Inflation seems to be the watchword right now," said Peter Schofield, managing director with Knott Capital in Exton, Pa.

"Bernanke is at a crossroads. First he was talking about hitting the pause button and now he seems to want to be more transparent talking about things before" the Fed's meeting, he added.

The Labor Department will release May PPI Tuesday, followed by CPI the next day. Both reports are due out at 8:30 a.m. EDT on each of the days.

According to a Reuters poll of economists, headline May producer prices are forecast to edge up 0.4 percent, compared with a 0.9 percent jump the prior month. But excluding food and energy, the gauge is expected to tick up 0.2 percent after rising 0.1 percent in April.

For May CPI, economists expect headline inflation to be 0.4 percent, after coming in at 0.6 percent in April. And stripping out highly volatile food and energy prices, the index is seen up 0.2 percent from a 0.3 percent rise the prior month.

Fanning inflation concerns has been the rise in crude oil prices, which analysts say could stifle consumer spending as higher gasoline prices weigh on household budgets.

Consumer Spending, Profit Jitters

Consumer spending is a key driver of corporate earnings and accounts for about two thirds of U.S. economic activity, so if it were to falter, analysts say Wall Street would likely have to say goodbye to four years of double-digit earnings growth this year.

"If we get a high number on inflation, people are going to think this 80 percent chance of a rate hike [at the end of this month] will go even higher," said Rick Campagna, portfolio manager, at Provident Investment Council in Pasadena, Calif.

"The yield curve is inverting and people are going to worry about the Fed raising rates so much they push us into a recession."

After a turbulent May, U.S. stocks have also seen a rocky start to June, which saw the Dow falling below 11,000 for the first time in three months. On Friday, concerns about higher interest rates took a sharper focus, causing stocks to swing wildly in a volatile session.

Indexes Swoon

The Dow Jones industrial average fell 46.90 points, or 0.43 percent, to end at 10,891.92. The Standard & Poor's 500 Index dropped 5.65 points, or 0.45 percent, to 1,252.28. The Nasdaq Composite Index ended down 10.26 points, or 0.48 percent, at 2,135.06.

The Dow capped its worst week in 14 months last week, ending down 3.2 percent. The S&P ended off 2.8 percent, and the Nasdaq fell 3.8 percent.

All major indexes have now sunk below their 200-day moving averages, closely watched long-term trendlines that measure a security or a stock index's resilience. But it's not only U.S. investors that have been rattled by the prospect of rising rates.

The European Central Bank and central banks in South Africa, India and South Korea all raised their official rates last week, and markets speculate that the Bank of Japan will join them in the next few months.

This week will be thin on the corporate earnings front, with only a handful of companies on tap to post results, including consumer electronics chain Best Buy Co. Inc. (BBY), investment banks Lehman Brothers Holdings Inc. (LEH) and Goldman Sachs Group Inc. (GS) and home builder KB Home (KBH).

More Fed Tough Talk Ahead?

On the Fed front, there will be another heavy roster of Fed speakers, including Chairman Bernanke, who will speak before an audience of students of the American Bankers Association on Monday.

Cleveland Fed President Sandra Pianalto is scheduled to speak on the economy and monetary policy at a function in Florida, also on Monday.

Dallas Fed President Richard Fisher will speak on U.S. global policy on Monday in Texas and on the economy on Wednesday. On Friday, St. Louis Fed President William Poole participates in a panel discussion on monetary and fiscal policy in South Korea, while Fed governor Donald Kohn speaks about globalization and monetary policy at a Boston Fed event in Chatham, Mass.

A number of other Fed officials are scheduled to speech on topics not directly related to monetary policy.

"The principal question the markets will face [this week] is will the Fed continue to raise interest rates, and if so how high? That is the question," said Hugh Johnson, chief investment officer of Johnson Illington Advisors, in Albany, N.Y.