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Wall St Week Ahead: Stocks face new rate fears after jobs data
Fri Feb 3, 2006 5:47 PM ET
By Caroline Valetkevitch

NEW YORK, Feb 3 - U.S. stock investors head into next week with fresh concerns about inflation and interest rates after Friday's payrolls report showed robust job and wage growth, while a less-than-stellar earnings picture could add to weaker sentiment.


Oil prices above $65 a barrel also could dampen the mood for bulls on Wall Street, as worries over possible United Nations sanctions against No. 4 oil exporter Iran over its nuclear program continue.

Friday's report from the Labor Department tripped the market, helping push stocks down for a second straight day.

"We'll have a spillover effect from the jobs report ... with the debate heating up about the inverted yield curve and the Fed making a move past the March meeting," said Fred Dickson, strategist at Montana-based D.A. Davidson & Co.

Fed policy makers raised interest rates for a 14th time on Tuesday and hinted more rate hikes might be needed to rein in inflation. This week's data showing a tighter job market raised warning flags about the economy, analysts said.

The Labor Department report showed the U.S. unemployment rate fell to 4.7 percent, its lowest level since July 2001.

January payrolls added 193,000 jobs, below expectations, but payroll numbers for other months were revised higher, depicting strength in the labor market. Average hourly earnings went up 3.3 percent in the past 12 months, the largest for such a period in nearly three years. [ID:nN02327612]

"If the economy continues to move along at a good pace, having some increase in labor costs, you'd expect," said Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston. "But to have it look like it's slowing and these increasing labor costs, that's not a good combination.

"It certainly places a headwind on stock prices."

Wall Street will watch for data on the U.S. international trade deficit on Friday. Investors will take special note of the impact of crude oil imports on the economy's health.

Economists polled by Reuters forecast the U.S. trade gap for December widened to $65 billion from $64.21 billion in November.

STOCKS END THE WEEK ON WEAK NOTE

For the week, the Dow average fell 1.04 percent, the S&P 500 index lost 1.54 percent, and the Nasdaq shed 1.81 percent.

On Friday, the Dow Jones industrial average <.DJI> ended down 58.36 points, or 0.54 percent, at 10,793.62. The Standard & Poor's 500 Index <.SPX> was down 6.81 points, or 0.54 percent, at 1,264.03. The Nasdaq Composite Index <.IXIC> was down 18.99 points, or 0.83 percent, at 2,262.58.

"This jobs report is what's hitting the market today," said Al Goldman, chief market strategist at A.G. Edwards.

But he added that "it's also some follow-on weakness to yesterday's big blood-letting, which goes back to the fact that we had a very good January, and we were entitled to a pullback.

"If the market gets a couple of more days of weakness, I'd say the correction is over."

MIXED SIGNALS FROM EARNINGS

The number of big-name companies reporting earnings next week will be lighter than in recent weeks, Dickson said.

Among companies expected to report next week are The Walt Disney Co. (DIS.N: Quote, Profile, Research), a media conglomerate and Dow component, and fast-food franchiser Yum Brands Inc. (YUM.N: Quote, Profile, Research), both on Monday, followed by Internet equipment maker Cisco Systems Inc. (CSCO.O: Quote, Profile, Research) and Coca-Cola Co. (KO.N: Quote, Profile, Research), another Dow component, both on Tuesday. A number of insurers, including Aetna Inc.(AET.N: Quote, Profile, Research), MetLife Inc. (MET.N: Quote, Profile, Research) and Prudential Financial Inc. (PRU.N: Quote, Profile, Research), are set to report results later in the week.

Dickson projects fourth-quarter earnings growth for S&P 500 companies at 12 percent to 13 percent.

The number of S&P 500 companies exceeding earnings-per-share estimates this reporting period is still above 60 percent, according to Reuters Estimates,

But disappointing reports from a number of high-profile companies, including Intel Corp. (INTC.O: Quote, Profile, Research), Google Inc. (GOOG.O: Quote, Profile, Research) and Amazon.com Inc. (AMZN.O: Quote, Profile, Research), have created a mixed bag of earnings for stock investors to assess.

"It doesn't set a real positive stage," Olsen said. "It makes it difficult for stock prices to go anywhere."

OIL ABOVE $65 A BARREL

Higher oil prices, which tend to weigh on stocks because they raise costs for corporations and consumers, are still cause for concern, analysts said.

U.S. crude for March delivery <CLH6> rose 69 cents to settle at $65.37 a barrel on Friday, after falling to the week's low of $63.95, which was the cheapest since Jan. 13 on the New York Mercantile Exchange. Earlier in the week, NYMEX March crude touched $69.

"Investors will be focusing on Iran and any developments there, as it might have implications on the price of oil, and of course, the future of the world," said Goldman, the A.G. Edwards strategist.

The United Nations nuclear watchdog deferred until Saturday a vote to report Iran to the U.N. Security Council over fears it is aiming to make atomic bombs, as the European Union lobbied developing nations to back the measure. (Wall St Week Ahead runs weekly. Any questions or comments on this column can be e-mailed to: caroline.valetkevitch(at)reuters.com) (Additional reporting by Emily Chasan)

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