updated 6/1/2004 9:13:19 AM ET 2004-06-01T13:13:19

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.

Major Market Indices

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.

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.”

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 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 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.

Economists predicted that 216,000 new jobs were added to U.S. nonfarm 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 percent.

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.

Fed speeches eyed
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 Inflation” 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 U.S. equity group at Deutsche Bank Private Wealth Management. “People are very concerned about the swift rise in rates that we’ve experienced so far.”

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