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(UPDATE 1)-Wall St Week Ahead: Economic data to call the shots

30/05/2004 21:10

(Adds comment regarding weekend Saudi attacks)

By Elizabeth Lazarowitz

NEW YORK, May 30 (Reuters) - Wall Street will be waiting on a batch of key economic data this week. But what's good for the economy may not be good for stocks as investors fret over the potential for a Federal Reserve interest-rate hike.

A report on the health of the U.S. manufacturing sector, due on Tuesday, and another on the number of U.S. jobs created in May, due on Friday, bookend a four-day week shortened by the Memorial Day holiday on Monday.

The economy has shown signs of surprising strength in recent months, but indications that inflation may be rearing its ugly head -- particularly as oil prices hit record highs -- have put stock investors on edge.

This weekend's oil industry attack in Saudi Arabia could also increase oil prices, at least in the near term, according to analysts polled by Reuters.

With the Fed's next policy-setting meeting just a month away, Wall Street is on watch for any clues to how much and how soon the central bank will begin lifting the benchmark fed funds rate from 1 percent, its lowest level since 1958.

Particularly strong data could heighten fears of aggressive rate hikes by the Fed, which could dent spending by individuals and businesses as borrowing costs rise.

"We seem to be in a 'good news is bad news' environment, at least on the economy," said Lincoln Anderson, chief investment officer at LPL Financial Services. "There's so much concern about Federal Reserve tightening, and the impact on the bond market, and through the bond market to stocks."

Earnings reports will be few and far between. Among the handful of companies set to issue results are filtration and purification systems maker Pall Corp. , supermarket chain Albertsons , and telecommunications software and services company Comverse Technology Inc.


RALLY MAY HIT A SPEED BUMP

The stock market has staged a blazing rally in recent sessions as oil prices retreated a bit, soothing worries that soaring energy costs would cut into consumer spending and corporate profits.

Last week, the Dow Jones industrial average advanced 2.2 percent, the Standard & Poor's 500 index climbed 2.5 percent, and the Nasdaq Composite Index jumped 3.9 percent. For the month, though, the Dow fell 0.4 percent, while the S&P 500 gained 1.2 percent and the Nasdaq shot up 3.5 percent.

The market's recent rally may begin to lose steam with worries about persistently high oil prices, turmoil in the Middle East, the U.S. military presence in Iraq and the possibility of attacks on the United States still weighing on sentiment, analysts said.

"We're in for some volatility," said Ozan Akcin, chief market strategist at Puglisi & Co. "There's still a lot of uncertainty out there that needs to be resolved."


FACTORIES, SERVICES AND JOBS

The Institute for Supply Management's closely watched nationwide survey of the manufacturing sector, due on Tuesday, is expected to be a healthy reading after Chicago-area industry data showed surprising strength on Friday.

Economists polled by Reuters predicted the ISM survey for May will tick down to 62.0 from 62.4 in April.

The ISM's nonmanufacturing survey, due on Thursday, is expected to show slower growth in the services sector, dropping to 66.0 in May from 68.4 in April.

Factory orders data, also scheduled for Thursday, will be another report to note. April factory orders are expected to show a drop of 1.2 percent, following a 4.3 percent gain in March.

The economic highlight of the week, however, will be the government's monthly payrolls report on Friday, and investors' anticipation could keep trading subdued early in the week.