The debate over inflation -- and the Fed's reaction to it -- is unlikely to be settled in the coming week, but the issue could get fairly heated with the release of the May consumer and producer price indices. "Everything hinges on the inflation data," says Milton Ezrati, chief economist at Lord Abbett. "And, more importantly, Chairman Bernanke's reaction to it." The May PPI will be released on Tuesday. According to Thomson First Call, economists expect the PPI to increase 0.5%, after a rise of 0.9% in April. The core PPI, which excludes food and energy, is expected to rise 0.2%, up from 0.1% growth in April. On Wednesday, traders will gauge the CPI to determine if those producer prices were pushed onto the consumer. Economists expect the CPI to jump 0.4% in May after a 0.6% rise the prior month. The core CPI is expected to be up 0.2%, down slightly from the April figure of 0.3%. "The Fed is in a data-dependent mode, and there are serious upside risks to the inflation numbers following last Friday's import prices report," says Jason Schenker, economist at Wachovia. "That could potentially be a negative for stocks because it furthers the case for an additional rate hike, but it could also help the sagging dollar." On Friday, the Labor Department said import prices rose 1.6% in May due to increasing energy costs. Economists were expecting import prices to rise 0.8%. Excluding the rise in petroleum costs, import prices were up 0.6%. After the news, the odds for a 25-basis-point fed funds rate hike at the June 29 meeting ticked up to 84% from 80% the day before. The short-term rate, which has been raised by 400 basis points over the past two years, currently stands at 5%.
"The markets are clearly spooked and reacting to the hawkish rhetoric out of the Fed," says Randy Diamond, sales trader at Miller Tabak. "That increases the likelihood of not only a 5.25% fed-funds, but if the CPI comes out too strong then the odds increase that the fed will move to 5.50% in the fed funds." Aside from the inflation figures, other economic data also has the potential to move the market. May retail sales will be released on Tuesday. Economists' consensus estimate calls for an increase of 0.1%, slower than the previous month's growth of 0.5%. Excluding autos, retail sales are expected to be up 0.5%, compared with 0.7% growth in April. On Wednesday, the Fed will open up its Beige Book. The report -- which is not a commentary on the views of Fed members -- summarizes anecdotal information collected by district Federal Reserve banks. Thursday brings a slew of economic data, including the NY Empire State index, net foreign purchases and the Philadelphia Fed survey for June. Also on tap for Thursday will be capacity utilization and industrial production figures for May. Economists predict capacity utilization will come in at 82%, up from 81.9% in April. Meanwhile, industrial production is expected to rise by just 0.2% compared with 0.8% the month before. The big data week finishes on Friday with current account figures for the first quarter, as well as the Michigan sentiment index for June.
big-time brokerage houses should add spice to an otherwise light earnings week on Wall Street. On Monday, Lehman Brothers ( LEH) reports its second-quarter results. According to Thomson First Call, analysts estimate Lehman will post earnings of $1.60 a share, up from $1.13 last year, on revenue of $4.18 billion. Tuesday will be a bit busier for earnings, with Best Buy ( BBY - Get Report) and World Wrestling Entertainment ( WWE - Get Report) scheduled to report.
And back on the financial front, Goldman Sachs ( GS - Get Report) will be reporting on Tuesday. Analysts are expecting the brokerage giant to post earnings of $4.13 cents a share, up from $1.71 last year, on revenue of $8.26 billion. Wednesday's earnings line-up includes Atari ( ATAR) and Capstone Turbine ( CPST). The action picks up slightly on Thursday with KB Home ( KBH - Get Report), Lions Gate Entertainment ( LGF) and Pier 1 Imports ( PIR) releasing quarterly results. Bear Stearns ( BSC) will be Thursday's broker du jour. Analysts project Bear Stearns will post a second-quarter profit of $2.95 a share, up from EPS of $2.09 a year earlier, on sales of $2.02 billion. And just in time for the weekend getaway, Winnebago ( WGO) is scheduled to roll out earnings on Friday before the market opens.