Wall Street to Focus on Inflation Signs

Any indication next week that inflation (search) may be cooling off would provide the fuel needed for a long-awaited pickup in U.S. stocks as the corporate earnings season comes to a close, market strategists said.

The Labor Department (search) will release reports on producer and consumer prices on successive days in the coming week. Investors will scour the numbers for signs of a let-up in recent inflationary pressures.

That could signal the Federal Reserve (search) might ease up on its campaign to raise interest rates and relieve the concern that has hung over stocks for much of the year.

Next week also will feature the final vestiges of the earnings season, with headline figures from major retailers, including Home Depot Inc. (HD) and J.C. Penney Co. Inc. (JCP) and top technology names like Hewlett-Packard Co. (HPQ) and Applied Materials Inc. (AMAT)

"The big question the market is facing is: Where does the Fed stop?" said Bryan Piskorowski, a market analyst with Wachovia Securities LLC, in Richmond, Virginia. "When does the Fed take their foot off the brake pedal?"

The Producer Price Index (search) report is expected to show a 0.4 percent rise for April, according to economists polled by Reuters. Factoring out volatile food and energy prices, the core PPI for April is forecast to gain 0.2 percent. The PPI report is set for release Tuesday.

The Consumer Price Index (search) is forecast to gain 0.4 percent overall, while the core CPI without food and fuel prices is expected to rise 0.2 percent, according to the Reuters poll. The CPI report is scheduled for release Wednesday.

Those numbers suggest a slower rate of price increases than the 0.7 percent gain in March of the overall PPI and the 0.6 percent increase in March in the overall CPI.

Since last June, the Fed has raised short-term interest rates eight times to stave off inflationary pressures.

"We have some indications that inflation may not be a long-term problem," said Ernie Ankrim, chief investment strategist at Russell Investment Group, of New York. "If we get surprised on the downside in these price numbers, it could be a strong equity week."

Other significant news on the economic calendar includes housing starts Tuesday and leading indicators Thursday.

For the week, the blue-chip Dow Jones industrial average (search) ended down 2 percent and the broad Standard & Poor's 500 Index fell 1.5 percent. Both broke three-week winning streaks. But the tech-driven Nasdaq Composite Index (search) rose 0.5 percent for the week.

So far this year, the Dow is down 6 percent, the Nasdaq is down 9 percent, and the S&P 500 is down nearly 5 percent.

Oil in the Spotlight

One factor easing the pressures on pricing is the recent falloff in U.S. oil prices, which dropped below $49 a barrel this week after hitting a record at $58.28 on April 4.

Strategists said much of the forecast increase in wholesale and retail prices would be the result of the runup in the cost of oil and other commodities over the past year.

If oil prices remain relatively low, that would be another boost to stocks, they said.

"Right now, the market doesn't believe the oil prices," said Milton Ezrati, senior economic strategist at Lord Abbett & Co., of Jersey City, N.J. "Some stabilization would heighten optimism."

Easing oil prices, coupled with last week's report of a 1.4 percent hike in April retail sales, were signs the overall economy was on solid footing, analysts said. However, they noted over the past week that stocks fell despite the solid retail sales report, with rumors of trouble at hedge funds and a weak earnings report from retailing giant Wal-Mart Stores Inc. (WMT) taking a toll on investors' confidence.

"As long as oil prices stay down and interest rates don't pop, at some point people are going to figure out the world is not so bad," said David Francis, vice president of equities at Thrivent Investment Management, of Appleton, Wisconsin.

So far this year, the 457 companies in the Standard & Poor's 500 index (search) that have reported earnings so far have topped analysts' expectations on average by 13.7 percent, according to Reuters Estimates.

Home Depot (search) is expected to post a 12 percent rise in first-quarter earnings per share, on 9.9 percent revenue growth, according to Reuters Estimates. The huge home improvements retailer, whose stock is among the 30 in the Dow average, will report results Tuesday.

Hewlett-Packard's (search) second-quarter earnings are seen rising 5.9 percent, on a 6.1 percent hike in revenue. Earnings for Hewlett-Packard, the personal computer and printer maker, also will be released Tuesday. HP is another Dow component.

The Dow Jones industrial average over the last month has traded as low as 9,979.11 on April 20 and as high as 10,409.23 on May 5.

With those swings in mind, analysts said they'd like to see stocks stay fairly steady over the next week, to give investors some time to develop confidence in the overall economy.

"If I could make the market do my bidding, I would take it sideways for another week or so," said Ralph Bloch, chief market analyst at Raymond James & Associates, a brokerage based in St. Petersburg, Florida. "The market is in the process of making a bottom."