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Inflation data next after rough week

NEW YORK -- Well, that was no fun.

Wall Street suffered its worst week so far this year as interest rate worries haunted investors and gave the major indexes a substantial beating. The Dow Jones industrials shed 356 points, the Nasdaq composite index widened its loss for 2006, and the Standard & Poor's 500 index now lingers just above the flatline.

And the market's nervousness will likely extend to the week ahead, which brings a raft of economic numbers critical to the Federal Reserve's next move on interest rates. As in the past, data that are too hot or too cold could give stocks a sharp move in either direction.

Ever since late last year, investors have watching inflation data for signals that the Fed has hiked rates enough to contain price increases. During the past two years, the central bank has nudged the nation's key short-term lending rate 16 consecutive times to 5 percent.

But while the economy has shown evidence of cooling off, oil prices still stand above $70 a barrel and are considered a potential inflation threat -- which raises the possibility that interest rates could keep climbing and put a serious dent in economic growth.

Fed chairman Ben Bernanke all but guaranteed another rate hike at the June 28-29 policy meeting when he said last Monday that core inflation -- without energy or food prices -- is nearing the limits of the central bank's tolerance. Bernanke appeared willing to stunt economic growth and raise rates as much as necessary in order to stem inflation.

For this reason, this week's data on wholesale and consumer prices will be particularly important for Wall Street's outlook on the economy. Coupled with the potential for an economic crash, the uncertainty has investors' backs against the wall.

Last week, the Dow tumbled 3.16 percent, the S&P 500 drooped 2.79 percent, and the Nasdaq plunged 3.8 percent.

Economic data
The Labor Department tomorrow releases the May reading of its closely watched producer price index, which measures prices changes for goods at the wholesale level. Overall PPI is projected to grow 0.5 percent after surging 0.9 percent in April; core PPI -- excluding volatile food and energy -- is seen rising 0.2 percent.

Then on Wednesday, the department follows up with its consumer price index. CPI is expected to increase 0.4 percent after a 0.6 percent rise last month. Analysts are predicting a more modest 0.2 percent growth in core CPI following a 0.3 percent jump in April.

On Thursday, the Commerce Department posts industrial activity for May. Growth in output is forecast to slow to 0.2 percent from 0.8 percent in April; capacity utilization is seen staying flat at 82 percent.

Friday's consumer-sentiment index from the University of Michigan will be monitored for evidence of deteriorating consumer strength. The index's preliminary reading for June is expected to tick 0.1 point lower to 79.

Investors will also be anticipating the government's weekly update on domestic oil and gasoline reserves Wednesday and the Labor Department's report on first-time unemployment claims, out Thursday. The Fed's Beige Book, due Wednesday, provides a snapshot of current economic conditions.

Earnings
Goldman Sachs Group Inc. reports its second-quarter earnings before the opening bell tomorrow. Wall Street's biggest investment bank is seen earning $4.19 per share, a sharp upswing from $1.71 per share a year ago. Goldman shares hit an all-time high of $168.55 in mid-April before the recent selloff pushed the stock down 11.1 percent since then to close Friday at $149.89.

This week also brings results from rival companies Lehman Brothers Holding Inc. this morning and Bear Stearns Cos. on Thursday morning, both of which are expected to post higher earnings compared with last year.

Earnings from Best Buy Co. are due tomorrow morning and should offer clues about the health of consumer spending. Analysts predict the electronic retailer's profit will edge up to 36 cents per share from 34 cents last year. Its shares ended Friday at $50.39, down 14.2 percent from an all-time high of $58.72 in early April.

KB Home's earnings, due Thursday afternoon, will provide a critical read on the nation's housing market. The company's profit is forecast to grow to $2.46 per share from $2.06 per share the year before. KB shares have languished amid signs of slowing home demand; the stock has fallen 38.5 percent this year to finish at $44.74 Friday.

Events
A number of Fed officials are scheduled to speak this week, including an appearance by Bernanke today. With nothing more than economic numbers to judge the interest rate outlook, investors will be scouring these remarks for any hints on whether inflation remains a problem.

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