US stocks: Inflation, interest-rates eyed

NEW YORK - Stocks could show some weakness this week as earnings season winds down, while inflation and interest-rate worries stoke investors' concerns about future profits.

Oil prices around US$48 a barrel could also keep up the pressure on the markets, strategists said.

On Monday, US financial markets will be closed for the Presidents Day holiday.

Retailers Home Depot Inc Gap Inc. J.C. Penney Co. Inc and Limited Brands Inc. are scheduled to report their quarterly results in the coming week as the curtain drops on the earnings season.

On Friday, Wall Street got a warning shot from a bigger-than-expected jump in US producer prices, excluding food and energy. The core Producer Price Index shot up 0.8 per cent in January, the government reported.

That increase -- the biggest gain since December 1998 and well above the Street's expectation for a 0.2 per cent rise -- fanned inflation fears and bolstered a growing expectation that the Federal Reserve will keep raising interest rates well into 2005.

The PPI report came on the heels of Federal Reserve Chairman Alan Greenspan's remarks to Congress that interest rates were still "fairly low," a signal that they will keep rising.

"I see a weak market as investors digest the earnings news, Greenspan's testimony and the producer prices data, which is clearly inflationary," said Tim Ghriskey, chief investment officer of Solaris Asset Management.

For the week, stocks fell. The blue-chip Dow Jones industrial average ended down 0.1 per cent. The Standard & Poor's 500 index finished the week down 0.3 per cent and the Nasdaq ended down 0.9 per cent.

CPI ON THE RADAR SCREEN

Inflation pressures, higher interest rates and high oil prices will not only hurt consumer spending, but will also raise the cost of doing business, strategists said. That spells bad news for corporate profits, already headed for a slowdown in 2005, they noted.

In such an environment, the US Consumer Price Index for January, which will give a reading on inflation at the retail price level, will be closely watched this week.

"The CPI report on Wednesday will be important as investors will be looking to see if the jump in producer prices will translate into a rise in consumer prices," said Michael Sheldon, chief market strategist at brokerage Spencer Clarke.

"If that happens, it will be a negative for the stock market as it will signal that the Fed will have to get more aggressive in raising rates to combat inflation," he added. "Further, higher prices in general and higher interest rates will weigh on consumer spending."

Both the overall CPI and the core CPI, excluding volatile food and energy prices, are expected to have risen 0.2 per cent in January, according to economists polled by Reuters.

Other economic data on the week's calendar include the consumer confidence index for February from the Conference Board on Tuesday and durable goods orders for January on Thursday. Weekly oil inventory data and jobless claims figures will also get attention.

"There is a clear danger from energy prices, which have been moving back up again," said Joseph Battipaglia, chief investment officer for Ryan, Beck & Co. "Any suggestion that oil inventories are being drawn down or there are potential supply disruptions will show up right away in the oil market going up and the stock market going down."

On the New York Mercantile Exchange, crude oil for March delivery settled at US$48.35 a barrel on Friday.

Oil prices are lower than crude's record high of US$55.27 a barrel last October, but are still up about 12 per cent so far this year.

- REUTERS