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NEW YORK (CNN/Money) -
Investors on Inflation Watch 2005 have a big week to look forward to -- or be wary of -- depending on how you look at it.
After a three-day holiday weekend -- financial markets were closed for Good Friday -- investors return to work Monday to face a week-long onslaught of economic news, culminating with Friday's March employment report.
"The jobs report is the cornerstone of the week," said Ned Riley, chief investment strategist at Riley Asset Management. "But a lot happens ahead of it."
Numbers on economic growth, manufacturing, factory orders and construction spending are all due, as well as consumer confidence and personal income and spending.
Wednesday's weekly oil inventory report will draw attention, as it always does, and quarterly earnings from Best Buy and Circuit City will also be of interest. Because next week is the last week of the quarter, it also traditionally brings a higher number of pre-earnings announcements, when companies warn or boast about their upcoming results.
But the big number will be Friday's monthly employment report, which falls, yes, on April Fools Day, though any investor would be a fool to ignore it.
Investors will be eyeing all the numbers, and the job report in particular, for clues to the issues that have left stocks in the red so far this year: is the economy growing at a reasonable clip? Is inflation getting out of hand? And if inflation is rising too rapidly, how much does the Federal Reserve need to speed the pace of its rate-hike campaign?
Worried about inflation
Amid rising commodity prices, slowing corporate profits and rising short and long-term interest rates, stocks have had a tough year so far.
On Friday, the major gauges closed lower for the third week in a row And barring a huge rally, they're set to end the first quarter down for the month, leaving them well in the red for the year. (See graph for details).
"The market has got to get its hands on this inflation issue," said John Forelli, portfolio manager at Independence Investments. "That's the way we're going to get out of this trading range."
Last week, already jittery investors got hit again after the Fed, in raising a key short-term rate for the seventh consecutive time, also said inflation was more of a concern -- suggesting the central bank's rate hikes may get more aggressive.
"I think the fear of interest rates being raised and the impact that would have on economic growth is public enemy No. 1 for stock sentiment right now," Forelli said.
Looking to employment
Because of the focus on inflation and rates, the job March report will be particularly important, analysts said.
Employers probably added about 225,000 to payrolls last month, according to economists surveyed by Briefing.com, down from 262,000 in February. The unemployment rate, generated by a separate survey, is expected to have fallen to 5.3 percent from 5.4 percent in February.
"We're back to the point where a good payroll number will be seen as bad," said Paul Mendelsohn, chief investment strategist at Windham Financial Services, "particularly since (Treasury) bonds have been setting up to sell off."
An especially strong number would fuel inflation worries and fan fears of half-point, rather than quarter-point, rate hikes by the Fed, a scenario that would hurt stock and bond prices, at least in the short run.
Higher rates slow the economy and corporate profits, thus hurting stock prices.
But a weaker-than-expected number might be good for stocks, implying inflation isn't out of hand, and that rates can rise more slowly.
"I think the bond market has already discounted a favorable report but not a negative report," Riley added. "If we see something less than 150,000, bonds will rally and stocks may, too."
What also may help stocks is that, from a technical standpoint, the market may be oversold, said Mendelsohn. "Technically, we should see a bounce here off the lower bands of the range," he noted. "If we don't, we could have a more serious problem in the months ahead."
Key events in the week ahead
- The Conference Board's consumer confidence index on Tuesday is expected to have inched lower to 103.4 in March from 104.0 in February, according to a Briefing.com survey
- Wednesday brings a revised read on gross domestic product growth in the fourth quarter. GDP is expected to have grown at a 4.0 percent annualized rate, versus an earlier 3.8 percent reading
- Electronics retailers Best Buy (Research) and Circuit City (Research) report quarterly results Wednesday morning. Best Buy is expected to have earned $1.55 a share versus $1.42 a year ago, according to a First Call survey. Circuit City is expected to have earned 57 cents, up from 46 cents
- Personal income and spending figures Thursday. Incomes probably rose 0.4 percent in February after falling 2.3 percent in January, while spending is seen up 0.5 percent after being flat
- February factory orders due Thursday are expected to show a rise of 0.8 percent after edging up 0.2 percent in January
- In addition to the job report, a revised University of Michigan March sentiment reading is due Friday. The index is expected to remain unchanged from the initial reading of 92.9, down from 94.1 in February
- The February read on construction spending, also due Friday, is expected to have risen 0.6 percent after rising 0.7 percent in January
- The Institute for Supply Management's manufacturing index is due Friday as well. The ISM index likely fell to 55.0 in March from 55.3 in February, according to forecasts.
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