Economic data to call the shots

Wall Street will be waiting on a batch of key economic data this week. But what is 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 US manufacturing sector, due tomorrow, and another on the number of US jobs created in May, due on Friday, bookend a four-day week shortened by the Memorial Day holiday today.

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.

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 one per cent, 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.

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.

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

The market's recent rally may begin to lose steam with worries about persistently high oil prices, turmoil in the Middle East, the US military presence in Iraq and the possibility of attacks on the US 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."

The Institute for Supply Management's closely watched nationwide survey of the manufacturing sector, due tomorrow, 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 non-manufacturing 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 per cent, following a 4.3 per cent 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.

Economists predicted that 216,000 new jobs were added to US non-farm payrolls in May, following a gain of 288,000 in April, according to a Reuters poll. The unemployment rate is expected to remain steady at 5.6 per cent.

Wall Street is hoping the data will give an indication of whether the Fed will hike rates at the next meeting of its policy-setting arm at the end of June, or wait.

Investors will be listening carefully to a couple of speeches by Fed governors for hints to the Fed's next move.

Fed Board Governor Susan Schmidt Bies on Thursday testifies before a Senate Banking Committee hearing on Bank Secrecy Act Enforcement and then speaks on international accounting standards board reform before an International Accounting Standards Committee Foundation meeting.

Of particular note is Fed Governor Donald Kohn's speech on the outlook for Iinflation at the National Economists Club on Friday.

The market's recent rally "is not going to carry through until we get more of a glimpse of when the Fed is going to move and by how much," said Owen Fitzpatrick, head of the US equity group at Deutsche Bank Private Wealth Management. "People are very concerned about the swift rise in rates that we've experienced so far."