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Market Looks to Fed for Insight on Inflation

Wall Street could be in for more volatility in the week ahead as investors brace for a new batch of key earnings reports and the U.S. Federal Reserve's assessment of the economy.

A slightly positive but extremely mixed bag of corporate earnings so far, coupled with choppy oil prices, has had the market on a roller-coaster ride.

After General Motors' $15.5 billion second-quarter losssoured the stock market on Friday, investors are now putting their hopes on upcoming results from tech bellwether Cisco Systems , consumer products maker Procter & Gamble and insurer American International Group , which are all due to report this week.

If the earnings show further weakness on the consumer side and deterioration in the broader economy, Wall Street could falter. Oil could also be a major headwind amid growing tensions over Iran's nuclear work.

"We're still only two-thirds of the way through earnings season, so people will be focused on that," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

"Generally, investors have felt relieved that the earnings have continued to be better than expected, realizing of course that the bar had been set awfully low."

Despite a mildly positive earnings picture, Wall Street was largely unable to advance during the past week, and remained not so far away from multiyear lows hit in mid-July.

The Dow Jones Industrial Average ended Friday with weekly losses of 0.4 percent, while the S&P 500 edged up 0.2 percent and the Nasdaq finished the week flat.

Even if earnings bring some relief, investors will be on edge as concerns about the impact of the credit crisis on the economy persist, especially after a government report on Friday showed U.S. unemployment rose to 5.7 percentin July, its highest rate in four years, as employers cut 51,000 nonfarm-payroll jobs.

The spotlight will fall on the Fed's statementthat will accompany its decision on interest rates on Tuesday.

After Fed policy makers voiced concerns about inflation at their last meeting, the statement will take on added importance with oil prices remaining volatile.

The bleak jobs report for July, along with a lower-than-expected second-quarter U.S. gross domestic product reading, have helped cement views that the Fed will keep benchmark lending rates steady at 2 percent for several months.

Short-term interest rate futures, which measure market sentiment toward Fed policy, were little changed in the wake of the jobs report.

"We have the Fed meeting but I am not expecting any big reaction to that. I think the market is going to stay in a fairly well constrained trading range and is going to move up and down with daily movements in oil," Dickson said.

Even with oil prices significantly below their all-time high above $147 per barrel, they continue to be a wild card as geopolitical tensions remain high in the Middle East.

On Friday, Israeli Deputy Prime Minister Shaul Mofaz said Iran will have the option to reach uranium production at military levels as soon as 2010.

Markets are concerned about a potential confrontation that could disrupt supply from the OPEC nation.

Crude oil rose more than $1 a barrel Friday to settle at $125.10 a barrelon the New York Mercantile Exchange.

Also on investors' radar will be the financial sector, which appeared more stable during the past few days after U.S. officials acted to stabilize the market on Wednesday, extending liquidity offerings to stressed banks and securities.

"If you look at the financials, they have been surprisingly strong despite the volatility in the market. You see Citigroup getting its act together and certainly Merrill doing house cleaning," said Tom Hepner, investment adviser at Ruggie Wealth Management in Tavares, in Florida.

The benchmark KBW index of banks closed the week with gains of 6.4 percent.

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