More Rate Hikes Could Force Stocks Down

Sunday May 14, 12:50 pm ET
By Christopher Wang, AP Business Writer Analysts Suggest More Stock Declines Possible if Further Increases in Borrowing Costs Arise

NEW YORK (AP) -- An inflation scare sent stocks, bonds and the dollar skidding at the end of last week and analysts say more declines are possible as it dawns on investors that further increases in borrowing costs could be in store.

The Federal Reserve boosted the overnight bank loan rate to 5 percent on May 10 and left the door open for additional increases if needed to offset the inflationary impacts of higher oil and metals prices.

The central bankers also left room for a pause in their series of 16 consecutive quarter-point increases if prices show signs of behaving. But with oil prices finishing the week up about $2 a barrel and gold prices jumping more than $30 an ounce, the odds of that appear to be growing slimmer.

"What the Fed is really trying to say is that it doesn't know what it is going to do next. And if the markets abhor anything, it is uncertainty," Scott Anderson, a senior economist at Wells Fargo, wrote in a report. "Expect bond and stock market volatility to increase from here until the inflation outlook solidifies."

That's why investors will be anxiously awaiting this week's government reports on wholesale and consumer prices. At the same time, robust first-quarter earnings, healthy job growth and upbeat retail sales all suggest the economy is still in decent shape.

The Dow Jones industrial average sank 1.7 percent last week after big drops on Thursday and Friday. The Standard & Poor's 500 index tumbled 2.6 percent and the Nasdaq composite index plunged 4.22 percent.

ECONOMIC DATA

The key reports this week will be the Labor Department's Tuesday reading on wholesale prices and the consumer price index report a day later.

Economists see April's producer price index swelling 0.7 percent after a 0.5 percent gain the month before; core PPI -- without volatile energy and food costs -- is forecast to edge up by 0.2 percent.

April's consumer price index is expected to rise 0.5 percent after a 0.4 percent increase in March. The CPI's core rate, which excludes food and energy costs, is seen rising 0.2 percent, less than the 0.3 percent jump a month earlier.

The Commerce Department on Tuesday delivers a critical datapoint for the housing market when it reports the number of new houses that were started in April. Housing starts are expected to total 1.95 million for the month, a slight drop from 1.96 million in March.

The Fed issues its report on industrial production and capacity utilization Tuesday, which offers clues about manufacturing demand and overall output. Production growth for April is estimated to slow to 0.4 percent from 0.6 percent the prior month, while capacity utilization is projected to be flat at 81.5 percent.

EARNINGS

Dow component Wal-Mart Stores Inc. releases its results Tuesday morning and is expected to post a quarterly profit of 61 cents per share, up from 56 cents a year ago. The discount retailer's stock has fluctuated in a narrow range so far this year and finished Friday at $46.54, down 8.5 percent from a 52-week high of $50.87 in December.

Hewlett-Packard Co., also a Dow component, has seen its shares rally over the past two years, almost doubling from an August 2004 low of $16.95 to a recent five-year record of $34.52. The computer maker's earnings, due out on Tuesday, are projected to reach 49 cents per share from 36 cents last year. HP closed at $32.13 Friday.

Dell Inc.'s earnings, scheduled for Thursday afternoon, could come into the spotlight after the computer maker last week slashed its first-quarter estimates. Dell's profit is forecast at 33 cents per share, slightly below last year's 37 cents. Its stock stands at a three-year low, falling 40 percent so far this year to close Friday at $24.02.

Retail stocks are also likely to see activity following earnings reports from Target Corp. on Monday morning and Home Depot Inc. on Tuesday morning.