CPI, Housing Weakness Seen Weighing On Stocks

Inflation, housing weakness to weigh on stocks

SAN FRANCISCO (MarketWatch) -- U.S. stocks will lose ground next week, pressured by a series of economic reports and corporate financial results that are expected to show the impact of a rise in consumer inflation and further weakening in the housing sector, market strategists said.

The reports, including the consumer price index, housing starts and building permits are expected to add to recent economic data showing higher prices and slowing economic growth. Financial results from Wal-Mart Stores Inc. and Home Depot Inc. , which will follow weak monthly same-store sales and unexpectedly soft retail sales data from the government, may also weigh.

"The overall trend [in the market] will probably be down next week," said Robert Pavlik, portfolio manager at Oaktree Asset Management. "The earnings season is [nearly] over, and there's going to be a refocus or tension back to the economy and concerns about inflation."

In addition to Wal-Mart and Home Depot, J.C. Penney Inc. and Federated Department Stores are among the retailers scheduled to release results. PC maker Hewlett-Packard Co. , automaker DaimlerChrysler AG , and chipmaker Applied Materials Inc. are also set to report.

Wal-Mart, H-P and Home Depot are the last three companies on the Dow Jones Industrial Average to release earnings, and only 14 companies on the S&P 500 Index are due to report next week, according to Thomson Financial.

The earnings growth rate for the first quarter rose further, to 8.5% from 8.1% last week.

"It still looks like we're going to fall short of 10% [growth]," said John Butters, senior research analyst at Thomson Financial. "With so few big companies left to report, the remaining Dow components would have to surprise by a pretty wide margin for us to push up to that."

The growth rate for the second quarter is now 3.2%, down from 3.5% a week ago largely because of cuts to estimates in the technology sector.

The core consumer price index, which excludes food and energy prices, for April is expected to rise 0.3%, up from 0.1% in March, according to a survey of economists by MarketWatch. Overall inflation is expected to rise 0.6%.

Stocks will fall if the core rate comes in higher than expected "especially with regard to what the Fed said just this past week about their...concern that inflation may not moderate," said Pavlik.

The Fed on Wednesday reiterated its stance that inflation remains its primary concern. The statement accompanied the central bank's decision to leave rates unchanged at 5.25%.

But any selloff next week "should stay relatively shallow," said Steve Goldman, chief market strategist at Weeden & Co.

The market has enjoyed hefty gains over recent weeks, but the advances were beginning to become "narrow and too concentrated...a combination of factors that suggested the market needed to aerate somewhat," said Goldman.

That push lower came Thursday, with a triple-digit decline on the Dow after gloomy April same-store sales fanned fears that consumers are pulling back on their spending as they feel the squeeze from the weak housing market and the rise in energy costs.

The softer sales figures, "could very likely [have been] due to tax season, people feeling a little bit of a hit from paying their tax bills and not going out and spending money," said Russell Lundeberg, chief investment officer at Barrett Capital Management.

An unexpected 0.2% drop in U.S. retail sales reported by the Commerce Department Friday added weight to those concerns. But with a tame reading on core inflation on the wholesale level, coupled with Thursday's sharp declines, investors spent the session bargain hunting, said Pavlik.

What cushions the outlook for retailers is that "none of them so far have really warned about lowering their estimates for the rest of the year despite some weake numbers," said Lundeberg, who believes that the market will move higher.

On the same day that the CPI is due, Wal-Mart is expected by analysts polled by Thomson Financial to report an 8% increase in both earnings and sales, to 68 cents as share on revenue of $87.14 billion.

Those figures will come on the heels of a report from the world's largest retailer that its same-store sales fell 3.5% in April, its worst monthly performance in nearly 30 years.

The Commerce Department on Wednesday is expected to report a decline in housing starts in April to 1.5 million from 1.52 million, and a fall in building permits to 1.52 million from 1.56 million. The following day, Federal Reserve Chairman Ben Bernanke will speak in Chicago about subprime mortgage markets and regulation.

The University of Michigan's preliminary reading on consumer sentiment in May is forecast to fall to 85.9 from 87.1 on Friday.

"The end result will be a week that we stabilize, consolidate recent gains," Goldman predicted of next week's equity action.

Fed speak; manufacturing data due

Chairman Ben Bernanke is scheduled to deliver a speech on the subject of credit derivatives Tuesday at the Atlanta Fed's financial markets conference. Federal Reserve Vice Chairman Donald Kohn is also scheduled to speak, and his topic for Wednesday will focus on financial stability and policy issues.

Federal Reserve Gov. Randall Krosner will be in Argentina to deliver speeches about emerging market economies on Tuesday and inflation issues on Wednesday.

The market may see improved readings from the manufacturing sector. The Empire state index, a gauge of manufacturing activity in the New York area, is forecast to rise to 5 in May from a rise of 3.8 in March. The report is scheduled for release on Monday.

Economists expect the Federal Reserve's reading on industrial production in April come in at 0.5%, from a drop of 0.3%. Capacity utilization is forecast to edge up to 81.6% from 81.4%.

Data from Philadelphia Federal Reserve Bank on manufacturing in that area is due Thursday. The Philly Fed index is forecast to rise to 1.5 from 0.2 in April.

Friday's market

Investors on Friday picked up shares of blue chips, which took a beating a day earlier. The Dow closed up 111 points at 13,326 and rose 0.5% for the week.

The S&P 500 gained 14 points to 1,505.85, and the Nasdaq Composite rose 28 points to 2,561.91. The S&P 500 was unchanged on the week and the Nasdaq fell 0.4%.

Treasury prices ended lower, leaving the yield on the benchmark 10-year Treasury note at 4.670% from 4.647% on Thursday.

Gold futures closed up $5.30 to $672.30 but lost 2.5% for the week.

The U.S. dollar lost ground against the euro Friday following the retail sales and wholesale inflation reports. For the week, the dollar was up 0.4% against the euro and was little changed against the yen.

Crude-oil futures picked up 56 cents to end at $62.37 and rose 0.7% for the week.

By Carla Mozee