Inflation will be on traders' minds when the Wall Street hordes get back from a three-day weekend on Tuesday.
A higher-than-expected core producer price index for January spooked the markets Friday, keeping a lid on stocks and sending the yield on the benchmark 10-year Treasury note to 4.27% from 4.18%. The PPI rose 0.3%, but excluding food and energy, prices jumped 0.8%, making it the biggest gain in six years. The consensus forecast was for a 0.3% increase in the producer price index and a 0.2% gain for the core rate.
Traders say the core PPI surprise raises the significance of the consumer price index, which will be released before the market opens next Wednesday. Economists are looking for the CPI to be up 0.2% vs. a drop of 0.1% the prior month.
Consensus estimates for the core CPI, which excludes food and energy, are also at 0.2%, the same as the prior period.
"Inflation is a lot worse than people realize and we saw that in the PPI numbers," says Richard Williams, director of research at Garban Institutional Equities. "Next week we see the CPI, which is often distorted because of assumptions about home ownership. But it will eventually catch up to the PPI."
The PPI shock took on additional importance because it came on the heels of Alan Greenspan's latest congressional testimony. While Greenspan said prices were largely in check, he warned that the weak dollar, high oil prices and flagging productivity could change that in the future.
Earlier this month, the central bank raised interest rates a quarter percentage point for the sixth time since late June, taking the federal funds rate up to 2.5%. The minutes from the
Federal Open Market Committee's
last meeting should add another piece to the puzzle when they are released on Wednesday afternoon.
"We will spend next week digesting Greenspan's testimony and looking for confirmation of positive economic numbers so we can get a bead on growth and, in turn, interest rates," says Paul Nolte, strategist at Hinsdale Associates.
Nolte is looking for traders to key off what he expects to be a higher-than-estimated durable goods number on Thursday and an upward fourth-quarter GDP revision on Friday.
"Based on the solid industrial production and capacity numbers we saw last week, next week's economic reports should highlight an economy that is steadily growing," says Nolte.
Unfortunately, a steadily growing economy means higher interest rates and, as evidenced by Friday's PPI surprise, the market has recoiled on the slightest hint of higher rates ahead. That's why Jay Suskind, head of institutional equity trading at Ryan Beck, is looking for the market to trade choppily "until it can get comfortable with the idea of higher rates."
Earnings may take a back seat to economics next week, but there are still some notable companies reporting results in the short week, starting on Monday with
. Analysts are expecting the Canadian mining company to post 9 cents for the company's fiscal fourth quarter, down from 16 cents last year, as well as comment on the firm's merger plans for
Wheaton River Minerals
A diverse set of companies will post earnings when trading resumes on Tuesday, including
Federated Department Stores
and pizza giant
, which will be delivering its second set of earnings since going public last summer.
Echoes of Alan Greenspan may haunt Wednesday's trading as the FOMC minutes will be released in the afternoon, but traders still anxious for earnings info can tune into releases from
World Wrestling Entertainment
. Nanotechnology will also be a focus of Wednesday's trading as
Retail rules on Thursday, Feb. 24, as the market will hear quarterly updates from
Finally, on Friday, Brazilian oil producer
reports earnings. Petrobras shares are up about 25% over the past three months as energy and Latin American stocks continue to be hot commodities on Wall Street.