The holiday-shortened week ahead amounts to a tempest of economic signals that will help traders confirm or deny their newfound interest-rate expectations.

The orderly drip of data last week was enough to slice the odds of a funds rate cut in 2007 to below 50%. It seems the economy's Achilles' heel may be on the mend.

Both the manufacturing and housing segments made a strong showing in April, and next week's data culminates in a quadruple-whammy on Friday that will clue investors into whether the upswing continued into May. Friday brings possible confirmations on falling inflation, the tight labor market, stable consumer spending and improving manufacturing activity.

Last week, a much stronger-than-expected new home sales report surprised investors, and a third monthly rise in durable goods orders proved that the inventory correction and manufacturing slump in the U.S. is likely over. To boot, initial jobless claims were once again low, pointing to a steady, if not falling, unemployment rate.

With housing and inventory drags abating, investors can more comfortably embrace the notion that the first quarter of 2007 was the trough in terms of economic growth. And, if the economy looks up from here, the

Federal Reserve

can comfortably wait for unemployment to increase before considering a fed funds rate cut.

But most observers say that even if next week's data confirm the market's suspicions that growth is improving, expecting rate hikes would be too extreme.

"While the macroeconomic risks stemming from housing's recession appear to be fading, consumer spending will still grow more slowly, and that lessens the need for a rate hike," says John Lonski, chief economist at Moody's Investors Service.

Reaccelerating growth sounds peachy for stocks, but traders say removing the dangling rate-cut carrot means

adjusting to a new and different trading environment -- one with higher interest rates and less conviction about the Fed's safety net.

Indeed, the

S&P 500

fell back from trading at a new record high three times this week, ending Friday down on the week by 0.04% to close at 1515.72. The

Dow Jones Industrial Average

also ended the week down 0.4% to close at 13507.28. The

Nasdaq Composite

was flat on the week, ending down just over one point at 2557.19.

As the S&P 500 bumped up against its record high, the yield on the 10-year Treasury note likewise bumped up against its 2007 high as bond investors rethink what has been a pessimistic economic view. The 10-year finished the week at 4.86%, up from 4.80% last Friday.

TGIF? We'll See

"The stock market will be digesting data next week, which reaches a crescendo Friday," says Art Hogan, chief market analyst at Jefferies & Co. But, Hogan adds there's sure to be supports for the stock market like deal-making to keep a floor on any nervous pullback.

Friday morning is "ridiculous," says Lonski.

The headlining act is May's nonfarm payrolls and unemployment report. The consensus of analysts expect the Bureau of Labor Statistics will report that the U.S. added 130,000 new jobs in May, and that unemployment remained steady at 4.5%. The unemployment rate, more than the payrolls growth, is key to the Fed outlook.

"Policy makers do not want to ease monetary policy until they are completely confident that inflation is contained, and for that to happen, economic slack has to open up," writes Joe Lavorgna, chief U.S. economist at Deutsche Bank, in a note pushing out his rate-cut call to this year's fourth quarter from the third quarter. That slack would come in the form of rising unemployment, he says, noting that he pushed out his forecast because of the surprisingly firm job market.

Investors will also get their next read on consumer spending and inflation Friday with the Fed's preferred measure of inflation, the core personal consumption expenditures index, included in April's personal income and spending data. Analysts expect the core personal consumption expenditures index, or the core PCE, to rise by 0.2%. The index "has a decent chance of getting back to the upper end of the 1% to 2% 'comfort zone,'" writes Jan Hatzius, U.S. economist at Goldman Sachs. Analysts expect income rose 0.4% in April and spending rose by 0.4% as well.

Inflation has been trending lower in the past couple of months and sits now just above the zone at 2.1%. Recently, however, Fed officials have said they won't be satisfied with inflation at even 2%, saying they'd like to see it down at 1.5% to be satisfied they won't have to tighten policy.

Most expect the Institute for Supply Management to corroborate recent data showing a rebound in manufacturing activity in the U.S. on Friday. Analysts expect the number to come in at 54 for May, down slightly from April's 54.7 report. The regional Chicago PMI comes Thursday, and most expect continued strength consistent with the national trend.

Leading up to Friday, the market will get a double dose of backward-looking information. Traders can chew on the minutes from the May Federal Open Market Committee meeting, which yielded little in terms of any change in the Fed's thinking from the seminal March meeting. In March, the Fed altered its language to soften its 'tightening bias.'

And Thursday brings the government's second attempt at estimating first-quarter GDP growth, which analysts expect to be revised downward to 0.7% growth.

Earnings season has mostly wound down, but next week brings reports from several retailers that could provide some more insight into consumer spending trends. Apparel companies

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Polo Ralph Lauren

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Jo-Ann Stores



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all report next week.


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Hovnanian Enterprises

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HJ Heinz


also report earnings in the week.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


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