NEW YORK – Investors will keep a sharp eye on inflation data next week with Wall Street anxious for any indication of whether the Federal Reserve will remain paused at its September meeting or resume hiking rates.
Aside from macroeconomic themes, earnings season winds down with several major retailers set to report results, including Wal-Mart Stores Inc. (WMT) , Home Depot Inc. (HD) , Staples Inc. (SPLS) and TJX Companies Inc.(TJX) — all on Tuesday.
Geopolitics still have the potential to roil markets next week as well, given that Israel said an expanded offensive into Lebanon was set to begin Friday even as negotiations continued at the United Nations on a cease-fire resolution.
The equity market may struggle to take a firm direction after the Fed's statement earlier this week also left investors unclear about the state of the economy. Stocks rose shortly after the announcement of the pause, only to turn lower once the implications of slowing growth sank in.
The Dow Jones industrial average settled down 36.34 points, or 0.33 percent, at 11,088.03 Friday, with the Standard & Poor's 500 Index 5.07 points lower, or 0.40 percent, at 1,266.74. The Nasdaq Composite Index was down 14.03 points, or 0.68 percent, at 2,057.71.
For the week, the Dow fell 1.37 percent, the S&P 500 slipped almost 1 percent and the Nasdaq dropped 1.31 percent.
"There seems to be a large divergence of opinion whether the economy will slow down dramatically and possibly experience a recession next year, and some who feel that once we get past a fairly short-lived period of below-trend growth, that the economy will pick up again," said Michael Sheldon, chief market strategist at brokerage Spencer Clarke in New York.
"It's this divergence that is creating a very choppy and difficult market for investors to navigate right now."
The Labor Department's report on the U.S. producer price index, set for Tuesday, followed by consumer prices data on Wednesday may give some indication about the Fed's next move.
"Inflation data will be important because the reason the Fed paused was on the premise that as the economy slows, inflation should peak and start to decelerate," Sheldon said.
"If the economy slows as expected, but inflation does not come down, that is likely to force the Fed's hand once again and make it more likely it will have to raise rates. That's not a favorable scenario for the economy or equity markets."
According to economists polled by Reuters, the headline PPI probably rose 0.4 percent in July. Core PPI, which strips out the volatile food and energy components, is expected to edge up 0.2 percent.
For July CPI, economists are forecasting a 0.4 percent increase and a 0.3 percent rise in the core consumer price index.
After whipping back and forth earlier this week, crude oil prices will likely still be a strong influence on equities, especially with hurricane season in full swing.
"Oil is the other key factor here ... We are closer to $70 than we are to $80, but pressure is on energy for higher prices to come," said Barry Hyman, equity market strategist, EKN Financial Services Inc. in New York.
Friday, U.S. crude oil for September delivery settled at $74.35 a barrel, up 35 cents, on the New York Mercantile Exchange. For the week, it fell 0.6 percent.
Stock investors have learned to keep a wary eye on oil because record high prices can ripple through the economy and raise the cost of everything from electricity and gasoline to most consumer goods, which often contain plastics or synthetics derived from crude.
On July 14, U.S. crude oil futures hit a record $78.40 a barrel as the conflict escalated between Israel's army and the Hizbollah guerrillas in Lebanon.
A WINDOW ON HOUSING
One area of the economy that most analysts agree is showing sure signs of slowing is the housing market.
Confidence of U.S. home builders as measured by the National Association of Home Builders Index, due Tuesday, is forecast to fall in August to the lowest level in 15 years. Builders have been plagued by canceled contracts.
Housing starts and building permits data on Wednesday will provide further information on the pace of housing in July.
Economists polled by Reuters predict that July housing starts slowed to an annual pace of 1.806 million units from 1.850 million in June; they see July building permits declining to a pace of 1.840 million units from 1.869 million in June.
"That back-and-forth swaying about inflation concerns and the economy is going to be what's damaging to the market," said Marc Pado, U.S. market strategist, Cantor Fitzgerald & Co. in San Francisco.
The University of Michigan survey of consumer sentiment Friday will feed the data-hungry market with the latest snapshot of how the all-important consumer may or may not spend going forward. The Reuters forecast calls for the University of Michigan's preliminary August reading on consumer sentiment to slip to 83.6 from July's 84.7.
After Tuesday's string of earnings reports from Wal-Mart, Home Depot and other big-box retailers, Wall Street will get results on Thursday from apparel retailers Gap Inc. , Limited Brands Inc. and Nordstrom Inc. .
Sears Holdings Corp. also is scheduled to deliver quarterly results Thursday.
Looking at retail sales data released Friday, "it looks like sales have come back in July. The second quarter wasn't a bang-up quarter, but we're off to a strong third quarter," said Lincoln Anderson, chief investment officer with LPL Financial Services in Boston.
The No. 2 personal computer maker Hewlett-Packard Co.will announce its quarterly results Wednesday, followed by rival Dell Inc. on Thursday.
As for the whole S&P 500, Anderson said, "It's looking like yet another very strong quarter for earnings, up something like 14 percent from the same quarter last year, and so far this year, a 9 (percent) to 10 percent increase in S&P operating earnings," Anderson said.
Reuters Estimates now expects growth in the second-quarter earnings of S&P 500 companies at 12.5 percent over the year-ago period, with 90 percent of those companies having reported results so far. That's an increase from an estimate of 12 percent a week ago, said Ashwani Kaul, senior market analytics specialist at Reuters Estimates.
One caveat for the week ahead is seasonal, according to Hyman of EKN Financial Services. He expects low volume.
"It's August ... the trading desks have disappeared. I wouldn't expect it to break out of the range."