New York – Although Wall Street has shown signs of recuperating from its recent selloff, this week’s batch of critical economic reports could easily shatter investors’ fragile optimism and send stocks sliding again.
With few earnings reports due, the market will once again be fixated on economic growth and inflation as traders judge the possibility of more interest rate hikes from the Federal Reserve.
Ever since the Fed warned earlier this month that higher rates could be needed to thwart the effect of surging energy prices, investors have been more cautious than usual about letting their expectations build. Last week’s erratic trading was evidence they’re still hesitant about putting money in the market; stocks had simply fallen so much that they were due for a bounce.
Analysts say that uncertainty will linger until the Fed makes its next move on interest rates at its June 28-29 meeting. Until then, Wall Street can only guess the odds of more rate hikes, taking cues from reports like this week’s data on worker productivity, job growth and manufacturing activity.
The key data in those reports will be their inflation measures, said Ken McCarthy, chief economist for vFinance Investments. The central bank’s mission has been to lift rates enough to support a growing economy but keep prices from climbing.
Stronger-than-expected increases could send investors retreating again.
But if the growth in labor costs and hourly wages match or come in slightly below economists’ estimates, that could help carve away at investors’ skepticism. “Those are the kinds of numbers the market would love to see because it shows the economy is growing but not in danger of overheating,” McCarthy said.
The major indexes got a boost toward the end of last week as evidence of a slowing economy brightened the outlook for interest rates. For the week, the Dow Jones industrial average gained 1.21 percent, the Standard & Poor’s 500 index added 1.04 percent and the Nasdaq composite index rose 0.75 percent.
The Labor Department on Thursday issues its first revision to data on worker productivity and wage costs for the first quarter.
Economists expect productivity will be increased to 4.2 percent from an initial reading of 3.3 percent last month. Unit labor costs rose 2.5 percent last quarter to leave the annual wage inflation rate at 1.4 percent.
Another critical report Thursday is the Institute for Supply Management’s manufacturing index for May, which is forecast to drop 1.3 points to 56. While any number above 50 indicates growth, investors will be focused on the prices-paid index, a measure of potential future inflation.
On Friday, the Labor Department reports monthly hiring for May. Employers are seen adding 175,000 jobs for the month, more than the 138,000 created in March. However, the important figure will growth in average hourly earnings; wage inflation remains one of the Fed’s main threats to rising prices.
