NEW YORK (CNN/Money) -
Around Wall Street, the talk is that the U.S. economy is not too hot, not too cool, but just right -- the fabled "Goldilocks" economy that means corporate profits can continue to grow, while inflation stays tame.
But some analysts worry that won't be enough to kick stocks out of their recent range-bound mode.
Friday's report on unemployment and payroll growth was the ultimate Goldilocks number, many analysts said. If it had been too strong, it might have raised fears that inflation and interest rates were about to skyrocket. If it had been too weak, then investors might have worried the economy was about to relapse into another slowdown, hurting corporate profits.
Instead, it was right in the middle, almost exactly as forecast -- a real yawner, but the kind of yawner markets like to see. [For a list of this week's key reports, click here.]
"I look at that as really good news for the market; you want something right in the sweet spot," said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston. "We're just in a nice, smooth acceleration, and now people are starting to think that's likely to be sustained."
The news helped stocks end the holiday-shortened week on a positive note. But the week was still fairly disappointing, all things considered. A decent pop in the last week of May had raised some hopes that markets had hit a near-term bottom and were on their way up.
Throw in the just-right jobs report, a drop in oil prices below $40 a barrel on the New York Mercantile Exchange and optimistic words from tech bellwether Intel (INTC: Research, Estimates), and you'd think stocks would have skyrocketed.
Instead, the Dow Jones industrial average, S&P 500 and Nasdaq all ended the week little changed, a sign that uncertainty still holds sway on Wall Street.
Some analysts doubt the fog will clear much before June 30, the day the Federal Reserve is widely expected to raise its target for a key overnight lending rate and the Coalition Provisional Authority is scheduled to hand the keys to Iraq to a new interim government.
Meanwhile, some analysts think stocks have gotten a little pricey in relation to their projected earnings, which are expected to decelerate this year, along with the economy. Not everybody agrees with this view, but until there's some consensus about it, stocks could be stuck in neutral.
"People will move along at an unhurried pace," said Larry Wachtel, market analyst at Wachovia Securities. "No one is rushing to get in, and yet there are bargains around, so we're in this range-bound atmosphere."
Not too long ago, the homely stepsister of inflation indicators was the producer price index (PPI). Heck, even the name is boring.
But with investors growing ever more anxious about the prospects for inflation and the future course of Fed policy, the PPI is suddenly more popular. The release, expected on Thursday, had been scheduled for Friday but was rescheduled after Ronald Reagan's death. With few other interesting indicators due in the coming week, and little in the way of notable corporate earnings, the PPI will be the belle of the ball.
"Markets are now focused squarely on inflation," said John Augustine, chief investment strategist at Fifth Third Asset Management. "Will it follow the great growth we've seen and force the Fed's hand to take rates up faster than the market currently anticipates?"
So far, most economists believe the answer is no. The Fed has promised to go slow in raising rates, and the market seems to believe it, pricing in just a quarter-percentage-point rate hike on June 30, followed up with a few more such increases the rest of the year.
But if PPI turns in another stronger than expected gain in May, as it did in March and April, and if the consumer price index (CPI), due on June 15, shows wholesale price gains are oozing into the realm of the consumer, then inflation fears could build, weighing on stocks.
"Suddenly these inflation figures have a psychological impact," said Wachtel of Wachovia Securities.
Key events in the week ahead:
- On Wednesday, the Commerce Department releases its estimate of growth in wholesale inventories in April. Economists, on average, expect inventories to grow 0.5 percent, following March's 0.6-percent gain, according to Briefing.com.
- On Wednesday afternoon, Kansas City Fed President Thomas Hoenig is scheduled to speak about the economy and interest rates. Hoenig is a voting member of the Fed's policy committee.
- On Thursday, the Bureau of Labor Statistics (BLS) releases data on export prices (excluding agricultural exports) and import prices (excluding oil) in May. This isn't ordinarily much of an attention-grabber on Wall Street, and not enough economists have guessed at it to generate a consensus, but heightened inflation worries could make it more noteworthy.
- Also on Thursday, the BLS releases the PPI for May (the release had been scheduled for Friday but was rescheduled after Ronald Reagan's death). Economists, on average, expect PPI to post a 0.6-percent gain, following 0.7 percent in April. Stripping out volatile food and energy costs, "core" PPI is expected to gain 0.2 percent, matching April's increase.
- Also on Thursday, the Labor Department announces the number of new claims for unemployment benefits filed in the week ending June 5. Economists, on average, expect 335,000 claims, compared with 339,000 the prior week.
- The Senate Banking Committee's nomination hearing for Alan Greenspan, recently nominated by President Bush for another term as Fed Chairman, begins Thursday morning. The committee will then make a recommendation to the full Senate, which will vote on whether or not to reappoint the 78-year-old Greenspan. Anybody want to take bets on the outcome? EDITOR'S NOTE: The hearing was rescheduled for June 15 following the death of Ronald Reagan.
- Friday morning brings the Commerce Department's estimate of the U.S. trade imbalance with the rest of the world in April. Economists, on average, think the gap shrank to $44.9 billion from $46 billion in March.
- Later Friday morning, the University of Michigan releases its first read on consumer sentiment in June. Economists, on average, expect the index to rise to 91.5 from 90.2 in May.
- Also on Friday morning, Atlanta Fed President Jack Guynn, who currently has no vote on the Fed policy committee, is scheduled to speak about the economy.
- U.S. financial markets will be closed Friday to honor the memory of Ronald Regan.