updated 5/15/2005 3:39:09 PM ET 2005-05-15T19:39:09

Oil prices appear to be in retreat, at least for the short term. The question on Wall Street is whether it’s too late for the rest of the economy.

Major Market Indices

Crude oil futures settled below $48 per barrel last week for the first time since mid-February. But given that oil prices spent most of the past three months well above $50 per barrel, it’s reasonable to expect that some of those costs will be passed on to consumers as that oil finally gets refined and makes its way to gas pumps.

Dow component Wal-Mart Stores Inc. sounded a warning Thursday that high gasoline prices were starting to eat into consumers’ spending money. The retailer said it would not meet Wall Street’s forecasts for the second quarter.

With oil lower and the dollar gaining ground, fears of inflation have eased on Wall Street, but have been quickly replaced by deeper fears of an economic slowdown, based on the theory that consumers will take it easy on their wallets going into this summer.

That will have Wall Street looking very closely at retailers’ earnings in the week ahead. With investors’ propensity to look past good news and focus on the negative, those retailers will need to have strong earnings and very bullish profit forecasts to keep their stock prices propped up.

Last week, concerns about consumer spending weighed heavily on the markets despite strong earnings from Dell Inc. that prompted a tech rally Friday. And falling oil prices only served to push utility and energy companies lower. For the week, the Dow Jones industrial average lost 1.98 percent and the Standard & Poor’s 500 fell 1.48 percent, while the Nasdaq composite index gained 0.48 percent.

Whither inflation?
In addition to the worries of an economic slowdown, any signs of inflation also will likely sink the markets. Two key reports this week should help answer the inflation question for the time being.

On Tuesday, the Labor Department will release April’s Producer Price Index, which measures the prices paid by companies on the wholesale level. The PPI is expected to rise 0.4 percent, down from a surprising 0.7 percent in March. With volatile energy and food prices removed, so-called core PPI is expected to just rise 0.2 percent, compared to a small 0.1 percent rise in March.

The PPI’s companion index, the Consumer Price Index, comes out Wednesday. Analysts expect the CPI to rise 0.4 percent in April, down from March’s 0.6 percent. Again, with energy and food prices removed, core CPI is expected to come in a 0.2 percent, down from 0.4 percent in March.

Lower-than-expected increases in either index could help the markets stem last week’s losses. Higher increases, however, could renew inflation concerns and raise the specter of “stagflation” — inflation that takes hold in a sluggish economy.

Home Depot, Gap to report
Of the numerous retailers reporting earnings in the week ahead, the biggest is Dow component Home Depot Inc. The home improvement retailer’s stock has fallen in lockstep with the rest of the market, dropping 18.1 percent from a Nov. 16 high of $44.30 to close Friday at $36.29. Home Depot, reporting before Tuesday’s trading session, is expected to earn 56 cents per share, up from 52 cents per share a year ago.

Thursday afternoon, the Gap Inc. will report its earnings. The clothing retailer is expected to post a profit of 30 cents per share, down from 34 cents in the year-ago quarter. Gap’s stock has traded between $20 and $22 for much of 2005, closing Friday at $20.21, but it is down 21.4 percent from its 52-week high of $25.72 on June 23, 2004.

While the earnings numbers will be important for these and other retail companies reporting this week, investors will be far more interested in their outlook for the second quarter and the rest of 2005, hoping Wal-Mart could be an isolated occurrence rather than a trend.

In the tech sector, which saw strong gains last week, it will be up to Hewlett-Packard Co. to support the trend. H-P is expected to post earnings of 36 cents per share, up from 34 cents last year, when it reports on Tuesday afternoon. The computer and printer manufacturer has risen 28.2 percent from its 52-week low of $16.08 on Aug. 12, 2004, though the stock’s movement has been extremely erratic due to the company’s management changes and past earnings snafus. The stock closed Friday at $20.62.

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