|
Rate fixation to continue
|
 |
June 13, 1999: 1:40 p.m. ET
Investors likely to look to CPI for clues about Fed action
By Staff Writer Nicole Jacoby
|
NEW YORK (CNNfn) - Wall Street's obsession with interest rates is likely to continue this week, as key government data reveal whether recent inflationary fears have been rooted in reason or panic.
The most widely anticipated figure is Wednesday's Labor Department report on the Consumer Price Index, considered the broadest measure of retail inflation.
A 0.7 percent increase in the April CPI figure -- the biggest jump in eight years -- caught many investors and economists by surprise last month, setting off fears that the Federal Reserve might raise interest rates in the coming months. In fact, following the report, the Federal Open Market Committee changed its bias toward tightening rates at its next scheduled meeting on June 29 and 30.
For May, economists are predicting an increase of 0.2 percent in the CPI.
The other big economic news of the week is the so-called "beige book," an outlook on the U.S. economy compiled by various regional Fed banks and released to the public eight times a year. The report, which also comes out Wednesday, is used as a blueprint for future discussion among Federal Reserve board members and usually yields clues as to whether the central bank will raise or lower rates.
Reverse psychology?
Although markets are likely to watch both reports closely, at least one analyst predicts investor reaction will be based on "reverse psychology."
"The markets have already discounted inflationary pressures," said Peter Cardillo, director of research at Westfalia Investments. In fact, the Dow Jones industrial average has shed about 500 points since last month's CPI report first set off inflation fears.
"The surprise [to investors] would be if the Fed didn't raise rates," Cardillo added, though he does not believe a rate hike is inevitable later this month.
But Steve Stovall, senior investment strategist at Standard & Poor's, contends there could still be a "negative pop" if rates are hiked, though he does not predict a "major sell-off."
"Reality can sometimes be more dramatic than planning," he said.
As far as next week's economic data goes, Stovall expects investors to be "heartened" if the CPI steps back from the levels of the previous month, especially after Friday's Producer Price Index came in exactly in line with estimates of 0.2 percent.
On the other hand, "if [the data] is not according to expectations, there may be another bout of worrying," Stovall said.
Eye on bonds
The bond market also will continue to catch the eye of Wall Street next week, as investors look for additional clues about long-term interest rate trends.
The technical breaking point could be if the 30-year Treasury bond reaches a yield of 6-3/8, Stovall said.
"Technically speaking, that could be interpreted as a negative signal for both interest rates and Wall Street," the analyst said.
Additional economic players
While far less significant than the CPI, other economic data may play a small role in stock markets next week.
On Monday, the Commerce Department is set to release its business inventories report, followed by housing starts figures two days later.
On Wednesday, the Federal Reserve Board will release data on industrial production and the Labor Department will disclose real earnings.
Rounding out the week will be Thursday's reports on international trade and current accounts.
Shifting focus
Looking past next week, analysts say economic factors will begin to take a back seat to profit news.
"The focus on inflation will change when second quarter earnings begin to roll in," said Cardillo, who predicts next month's corporate results could "set the stage for a summer rally."
|
|
|
|
|
 |
|
