Investors to Watch Inflation, Jobs Data

If the economic numbers show inflation is contained next week and no major companies warn of poor results in the earnings season, stocks could rise in the holiday-shortened week ahead.

Among the economic data, investors will focus on the June non-farm payrolls report and anything with a price component that will shed light on the pace of inflation.

Monday kicks off the first week of July, with the potential for the number of earnings pre-announcements to pick up, which could act as one of the main drivers for equities.

"If we don't get any, or many, pre-announcements, that will be seen as being positive — it all depends on who is saying what," said Sam Rahman, a portfolio manager with Baring Asset Management in Boston.

Aside from a focus on inflation and a lack of earnings reports to give the market direction, a key aspect of the week will be volatility resulting from a lack of market participants.

"There will be a little bit of volatility because most of the world will be on vacation," said Brian Williamson, a vice president in equity trading at The Boston Co. Asset Management.

The New York Stock Exchange will close early at 1 p.m. Monday ahead of the Independence Day holiday on July 4. Trading will resume Wednesday morning.

Mixed Bag for Quarter and June

The second quarter was not kind to the stock market. Only the blue-chip Dow Jones industrial average managed to finish the second quarter with a gain — ending up 0.37 percent. But the Nasdaq Composite Index slid 7.17 percent, while the Standard & Poor's 500 Index fell 1.90 percent.

And the month of June definitely was not honeymoon season for stock investors. The three major U.S. stock indexes finished the month of June about where they started it, with the Dow down 0.16 percent for June alone, while the S&P 500 inched up 0.01 percent and the Nasdaq declined 0.31 percent.

With the first half of 2006 in the rear view mirror at Friday's closing bell, the Dow is up 4.03 percent for the year so far and the S&P 500 is up 1.76 percent for the year to date. The Nasdaq is down 1.51 percent for 2006 so far.

Friday, U.S. stocks ended lower in a volatile trading session as weaker-than-expected data on Chicago-area manufacturing offset hopes for better prospects for General Motors Corp. .

The Dow closed Friday down 40.58 points, or 0.36 percent, at 11,150.22 and the S&P 500 Index fell 2.67 points, or 0.21 percent, to 1,270.20. The Nasdaq Composite Index ended Friday down 2.29 points, or 0.11 percent, at 2,172.09.

For the week, stocks rose. The Dow rose 1.5 percent, while the S&P 500 advanced 2.1 percent and the Nasdaq finished the week up 2.4 percent.

Earnings and the Economy

Looking ahead, second-quarter earnings are now forecast to grow 9.5 percent, according to Reuters Estimates.

With 21 S&P 500 companies reporting results through last week, 81 percent have beaten Wall Street's projections, while 14.3 percent have missed forecasts, according to data compiled by Reuters Estimates.

But after the Federal Reserve raised the fed funds rate a quarter of a percent on Thursday and toned down its previous warnings about inflation and the possible need for further rate increases — inflation is still on investors' minds.

"Now that we are past the Fed meeting, between now and the next one in August, what will drive the stock market is inflation," said Anthony Chan, managing director and chief economist at JPMorgan Private Client Services in New York.

"Next week, we'll have the monthly jobs report, but guess what? People will be looking at the wage component of the report. That's what the Fed is paying attention to,"

June non-farm payrolls are forecast to have added 155,000 new jobs, according to economists polled by Reuters. The June jobs report, set for release Friday, is expected to show that average hourly earnings rose 0.3 percent. The unemployment rate is likely to hold steady at 4.6 percent.

"We all know that the economy is slowing, but the question still out there is inflation," Chan said.

Concerns about the impact of higher energy costs on inflation and corporate profits will keep investors watching the price of crude oil.

Friday, U.S. crude oil for August delivery rose 41 cents to settle at $73.93 a barrel — up $3.06, or up 4.3 percent, from the previous week — on strong gasoline demand at the pump before the Independence Day holiday weekend.

What the prices-paid portion of the Institute for Supply Management's index on manufacturing growth says about the inflation picture also will garner investor attention. The ISM's June manufacturing report is set for a Monday release. That report will be followed Thursday by the ISM's June survey on the non-manufacturing, or services, sector.

The Reuters poll calls for the ISM manufacturing index to edge up to 55.0 in June from 54.4 in May, while the ISM's services index is forecast to slip to 59.0 in June from 60.1 in May.

Rounding out the short week's full menu of economic data will be construction spending for May and U.S. domestic car sales Monday; factory orders for May and revised May durable goods orders Wednesday, and the Challenger layoffs report for June Thursday. Weekly jobless benefits claims and weekly mortgage data also will be released Thursday.