Stocks Eye Consumer Prices, Retail Results

With the pace of corporate earnings reports slowing, Wall Street will have its eye on consumer prices and other economic indicators in a holiday-shortened week.

The U.S. stock market will be closed Monday for the Presidents Day holiday. On Tuesday, trading will resume and earnings from Dow components Wal-Mart Stores Inc. (WMT), Home Depot Inc. (HD) and Hewlett-Packard Co. (HPQ) will be among those getting scrutiny from U.S. stock investors.

Wal-Mart, the world's biggest retailer, will report earnings for its fiscal fourth quarter, which ended in January. The company has already said that sales at stores open at least a year rose in December and January after a small decline in November.

Home improvement retailer Home Depot, grappling with a number of strategic issues, may not set the tone for the rest of the market. But the company, and its rival Lowe's Cos. (LOW), which will report this coming Friday, will likely be studied for an indication of the impact of the housing slowdown. This is especially true after Friday's data showing a 14.3 percent drop in U.S. housing starts in January — the sharpest decline since October.

Stocks rallied this week after Federal Reserve Chairman Ben Bernanke gave investors "a love note," as Lehman Brothers' chief U.S. economist Ethan Harris put it. On Wednesday, Bernanke told the Senate Banking Committee that he believes inflation pressures are easing and the U.S. economy should grow moderately.

So it's a safe bet that investors will be anxious to see next week's data on consumer prices. On Friday, the government said wholesale prices, measured by the overall U.S. Producer Price Index, fell more than expected in January.

The U.S. Consumer Price Index for January will be released by the Bureau of Labor Statistics Wednesday at 8:30 a.m.

"Investors want to see the core CPI in a fairly moderate range," said David Spika, investment strategist at Westwood Holdings Group in Dallas.

He said some Federal Reserve officials do not like to see the core CPI, which excludes volatile food and energy prices, get above 2 percent year over year.

The median forecast among analysts polled by Reuters is for a 0.1 percent increase in January CPI from December. The core CPI, excluding volatile food and energy prices, is forecast to gain 0.2 percent in January.

On a year-over-year basis, the Reuters forecast calls for a 2.0 percent increase in the overall CPI and a 2.6 percent gain in core CPI. On Friday, the Labor Department said the overall PPI fell 0.6 percent in January, while core PPI rose 0.2 percent.

On Friday, U.S. crude futures for March delivery settled at $59.39 a barrel, down 50 cents from a week ago.

The index of U.S. leading economic indicators also is due Wednesday, with the median forecast calling for a gain of 0.2 percent, according to the Reuters poll.

Dow's Record Streak

The Dow shot up more than 100 points Wednesday to close at a record and score its best day this year. It followed that up with back-to-back record closes on Thursday and Friday — and set a lifetime intraday high at 12,779.03 on Thursday.

At Friday's close, the Dow had wrapped up its best week since Nov. 19.

For the week, the blue-chip Dow Jones industrial average rose 1.5 percent, while the broad Standard & Poor's 500 index gained 1.2 percent and the Nasdaq Composite Index advanced 1.5 percent.

More Double-Digit Gains

As the earnings period winds down, Wall Street will be watching to see if the fourth-quarter of 2006 continues the long string of consecutive quarters of double-digit percentage gains in earnings for companies in the Standard & Poor's 500 Index.

Data from Reuters Estimates shows that through Feb. 12, with 373 S&P 500 companies reporting, earnings were projected to rise 10.1 percent from a year earlier. The calculation included the results of the 373 companies and estimates for the rest.

Other companies due to report earnings next week include retailer J.C. Penney Co. Inc. (JCP) and tax preparation firm H&R Block Inc. (HRB). H&R Block also has a subprime lending unit, which will get plenty of attention after the recent disclosures of rising mortgage defaults in the subprime sector from big banks and lenders.

Broadcaster Clear Channel Communications Inc. (CCU) will report results Friday, the same day as a deadline it has set for bids for a group of radio stations that it is selling.

Spika of Westwood Holdings Group in Dallas said that year-over-year earnings notwithstanding, there has been a decline in earnings from the third quarter of 2006 to the fourth quarter. A sequential decline in those two quarters is a rare occurrence, he noted.

He also said that many of the estimates for the first and second quarters of 2007 are pointing to year-over-year earnings increases in the range of 5 percent to 6 percent.

"We are probably a good four years into the economic expansion and it's normal to see an orderly slowdown in economic growth," Spika said.

Watching the Merger Machine

Although mergers typically come by surprise, Spika calls them a "wild card" for Wall Street. Activity has been running at a furious pace, with data firm Dealogic reporting 3,235 global deals this year through Feb. 15. The dollar volume of those deals, at $482.2 billion, is up 28 percent from the same period in 2006.

The big question for Wall Street is whether the U.S. stock market will consolidate recent gains, or whether it is vulnerable to profit-taking.

"The cushion of cash that sits in the marketplace still provides a reasonable support point for the market," said Fred Dickson, strategist for Lake Oswego, Ore.-based D.A. Davidson & Co. "But I think we're going to bounce against that cushion of cash unless we have some big merger announcements.

"Without that, we could have a test to the downside, but it will be minor," he said.