updated 3/6/2006 9:15:52 AM ET 2006-03-06T14:15:52

Stock investors will focus on the February jobs report this week for clues about the U.S. economy’s health and how much higher interest rates may rise.

Major Market Indices

“A strong payroll report will pretty much seal the fate that there is certainly one and possibly two more rate hikes ahead,” said Doug Riley, senior portfolio manager at Boston Advisors, Inc.

In a Reuters poll published on Friday, economists forecast that the U.S. economy added 210,000 jobs in February, up from a gain of 193,000 in January. The unemployment rate is likely to hold steady at 4.7 percent.

Wall Street expects the Federal Open Market Committee, the Federal Reserve’s policy-making panel, to raise the fed funds rate a quarter-percentage point to 4.75 percent from 4.5 percent at its March 27-28 meeting.

But last week’s spike in the benchmark 10-year U.S. Treasury note’s yield to 4.69 percent, a one-year high, bolstered the perception that the Fed will raise borrowing costs at least one more time after that before ending its credit-tightening campaign. The Fed began raising rates on June 30, 2004, in an effort to curb inflation.

“Rising interest rates are putting a little bit of pressure on the stock market,” said Fred Dickson, market strategist at D.A. Davidson & Co.

“Early in the week, I would expect to see the market pull back. But we may see some strength later in the week ahead of the employment report,” he added.

Federal Reserve Chairman Ben Bernanke will speak on Wednesday to a community bankers’ conference. Investors will tune in to see if he gives any hints about when the cycle of rate increases may end. The presidents of the Federal Reserve Banks of St. Louis and Chicago also are scheduled to speak this week.

Friday’s volatile trading session pulled the rug out from under the Dow industrials and the Standard & Poor’s 500 Index, which were on track to finish the week slightly higher -- until a midday rally evaporated in a late afternoon decline.

For the past week, the Dow Jones industrial average fell 0.36 percent, ending Friday at 11,021.59, above the psychologically important 11,000 mark, while the S&P 500 finished the week down 0.17 percent, at 1,287.23.

But the Nasdaq Composite Index bucked the trend, finishing the week up 0.68 percent at 2,302.60.

Last Monday, February 27, the S&P 500 touched an intraday high of 1,297, its highest level since late May 2001. The previous week, on February 22, the blue-chip Dow average hit a session high at 11,159.18, its highest level since June 2001, as the core consumer price index for January and sliding oil prices eased concerns about inflation and rising rates.

For the month of February, the Dow ended up 1.2 percent and the S&P 500 inched up 0.05 percent, while the Nasdaq fell 1.1 percent.

Hourly pay, oil and inflation
Wages will come under special scrutiny this week in Friday’s report on February payrolls because the Fed watches labor costs to see if the pace of inflation may be picking up, according to Anthony Chan, chief economist at JPMorgan Private Client Services.

Average hourly earnings, a component of the monthly payrolls report, are expected to have risen 0.3 percent in February, according to economists surveyed by Reuters. In January, average hourly earnings gained 0.4 percent.

“In theory, when the economy is doing well, profits do just fine even if labor costs increase,” Chan said.

In the coming week, revised fourth-quarter data on productivity and unit labor costs will be released on Tuesday by the Labor Department.

The Reuters poll of economists calls for a 0.1 percent dip in productivity and a 3.1 percent gain in unit labor costs in the final quarter of 2005. The previous readings were a 0.6 percent drop in productivity and a 3.5 percent gain in unit labor costs.

Oil prices, another inflation indicator, will stay on Wall Street’s radar screen this week.

On Friday, U.S. crude for April delivery rose 31 cents, or 0.5 percent, to settle at $63.67 a barrel on the New York Mercantile Exchange. Oil prices rose on concerns about supply disruptions related to violence in Nigeria and tensions over Iran’s nuclear ambitions.

For the week, the price of NYMEX April crude was up 1.2 percent.

The jump in U.S. Treasury bond yields last week came after the European Central Bank raised interest rates on Thursday and hinted at the need for further moves, while rising inflation in Japan suggested interest-rate rises may be coming there, too.

“At some point, people are going to start asking how much further the Fed goes and when do higher rates start encroaching on growth?” said Edward Bretscher, principal of equity sales and trading at First Albany Corp.

“It’s amazing. For all of the talk there was a while ago about higher rates slowing down growth, nothing has been made of it recently,” Bretscher added. “It’s something that needs to be looked at and will likely be talked about (this) week.”

Factory orders, trade gap ahead
On Monday, reports on U.S. factory orders for January and revised January data for durable goods orders are set for release. Factory orders are expected to have dropped 5.3 percent in January, according to the Reuters poll.

On Thursday, the U.S. international trade deficit for January is due from the Commerce Department. The trade gap is likely to have widened to $66.5 billion in January from $65.68 billion in December, according to the Reuters poll.

On the earnings calendar, results are on tap this week from the Kroger Co., the largest U.S. grocer, and Albertsons Inc., another grocery chain.

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