NEW YORK – Volatility is in store for stocks this week as investors try to gauge the outlook for inflation and interest rates amid a large slate of U.S. economic releases, including May payrolls.
Stocks ended on a positive note Friday after see-sawing during the week, as a report showing the pace of U.S. inflation in line with Wall Street's expectations offset a drop in consumer confidence.
This week's key data release is the jobs report, due on Friday. But traders also will get another read on consumer confidence, as well as reports on regional and national business activity and government data on factory orders and durable goods in the holiday-shortened week.
Markets will be closed on Monday for the Memorial Day holiday.
Investors will search the data for clues on whether the Federal Reserve may choose to keep raising interest rates in an effort to control inflation.
"The stock market will be subject to a couple of "bear" forces, the main ones being inflation and rising interest rates," said Gregory Jones, a senior portfolio manager at Clay Finlay in New York. "The next couple of weeks, and maybe months, will be very volatile, as it seems stocks are bound for a correction."
Inflation fears and concern about higher interest rates have triggered a sell-off in U.S. stocks and emerging markets this month. On Friday though, a report showed the Fed's favored gauge of inflation — the personal consumption expenditure price index excluding food and energy — rose 0.2 percent in April, matching market forecasts.
The inflation data helped stocks finish the week higher for the first time in three weeks on Friday. The Dow Jones industrial average rose 1.21 percent in the week, while the Standard & Poor's 500 Index was up 1.04 percent and the Nasdaq Composite Index gained 0.75 percent.
"All eyes continue to be on the Fed and any data that can give us a better glimpse of what they're going to do, investors will take to heart," said Edward Bretschger, a principal for equity sales and trading at First Albany Corp in New York.
With few corporate earnings reports scheduled, the most heavily anticipated number this week is likely to be the Labor Department's May jobs report on Friday, which traders will parse for signs of wage inflation.
Economists polled by Reuters forecast the U.S. economy added 175,000 new posts outside the farm sector in May, after a 138,000 increase in April. The unemployment rate is expected to remain unchanged at 4.7 percent.
"THE BIG NUMBER"
The jobless report is "the next big number that we're going to see," said Tim Smalls, head of U.S. stock trading at Execution LLC, in Greenwich, Connecticut.
When trading resumes on Tuesday, investors will get another look at consumer confidence. The confidence index compiled by the private Conference Board will likely show a reading of 101.1 in May, lower than the 109.6 registered in April, according to economists' estimates.
On Wednesday, the National Association of Purchasing Management-Chicago will release its index of Midwest manufacturing activity. The index is expected to show a fall to 56 in May, from 57.2 in the prior month. Still, readings above 50 indicate economic expansion.
On Thursday, the Institute for Supply Management will reveal its index on national economic activity for May. The index is forecast to fall to 55.5 from 57.3 in April.
Also on Friday, after the jobs report, investors will get a reading for April factory orders and revisions to April durable goods data. Factory orders likely fell 2.2 percent that month, after a 4.1 percent jump in March, according to economists' estimates.
"The economy is still growing at a healthy pace," said Jane Caron, chief economic strategist at Dwight Asset Management Co., in Burlington, Vermont. "But it's a tough time for the markets because there's not a very clear indication of what the Fed is going to do next. That may persist, at least until the next Fed meeting."
ROOM FOR GAINS?
After the rebound in stocks on Friday, some traders and investors say there may be room for some further gains.
"Barring anything happening over the long weekend, I think you've got a situation where you can have a sustained rally over the next three or four days," said Smalls at Execution.
But investors should be cautious, recommended Jones at Clay Finlay.
"The temptation to buy stocks after a dip is big," he said. "But the summer may not be easy for stocks, and it may still be a bit too soon for aggressive buying."