Housing, CPI Numbers May Feed Hopes Of Recovery

Stock investors will watch housing starts, CPI and other data this week for signs that hopes for economic recovery will not turn out to be false.

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If recent weeks' activity is any indication, stocks may stay in a narrow trading range, as recovery hopes have been met with concern about an uncertain job market, rising gasoline prices and higher borrowing costs.

The three major U.S. stock indexes ended just slightly higher for the past week, even though the Dow Jones industrial average broke into positive territory for the year for the first time since early January.

"We've been in a slow, upward drifting trading range," said Fred Dickson, a market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "Investors are going to be looking to see ... if the green shoots in the economy have sprouted a little bit further or are languishing, waiting for some more water."

• Week Ahead: Stocks Trapped in a Range

The benchmark S&P 500 is up 39.86 percent since the 12-year closing low of March 9, and investors have been eager for more definitive signs that the recovery is going to be strong enough to sustain a rebound in corporate profits, which probably would underpin stronger gains in the market.

Besides data on construction of new housing, which has been among the weakest parts of the economy, investors will scrutinize readings on inflation at the wholesale and consumer level, when the Producer Price Index and the Consumer Price Index for May are released this week. Wall Street also will note the numbers on industrial production and capacity utilization as well as weekly initial jobless claims.

With oil prices back above $70 a barrel, inflation worries could hinder the Federal Reserve's efforts to end the recession, pushing up interest rates and delaying any recovery.

Federal Reserve Chairman Ben Bernanke will speak on Wednesday at a global financial literacy summit in Washington.

On Friday, the Dow Jones industrial average gained 28.34 points, or 0.32 percent, to 8,799.26. The Standard & Poor's 500 Index gained 1.32 points, or 0.14 percent, to 946.21. The Nasdaq Composite Index dropped 3.57 points, or 0.19 percent, to 1,858.80.

For the week, the Dow advanced 0.4 percent, the S&P 500 added 0.7 percent and the Nasdaq rose 0.5 percent. For the year, the blue-chip Dow average is up 0.26 percent.

Volatility May Jump

Concern about higher borrowing costs for businesses and consumers mounted this week as the benchmark 10-year U.S. Treasury note's yield briefly touched 4 percent after Wednesday's auction of 10-year notes.

"We may be putting in a high point, if not a top, in this run in yields," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, in San Francisco. "The bigger picture is that things are turning the corner slowly."

Making the week's outlook even more complicated is the scheduled quarterly expiration of four different types of June equity futures and options contracts, which is known as quadruple witching.

The event, analysts said, could create greater volume and volatility as investors close out their positions.

"It's a pretty busy week in terms of economic data as we come into the expiration. I'd expect to see a tremendous pickup in volatility," said Paul Mendelsohn, chief investment =strategist at Windham Financial Services in Charlotte, Vermont.

With added volatility, the market could break out of its =recent trading range, he said.

"The question is: 'Can we get through the options expiration and hold onto these gains and maybe move a little higher?"' Mendelsohn said. "I think prices have gone too high."

Resource and technology shares have led gains in the market's recent rise, and while the run up in oil prices has sparked some concern about inflation, it has given the energy sector a big lift.

• CNBC Energy Page

U.S. crude oil settled at $72.04 on Friday, down 64 cents on the day. However, oil is up sharply from its low of $32.40 in December.

PPI, CPI and Housing Starts

Investors will get a clearer picture of inflation with producer price data on Tuesday, followed by consumer price data on Wednesday. Housing starts are also expected on Tuesday, along with industrial production figures.

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The Producer Price Index is expected to increase 0.6 percent month over month in the May headline number, following a gain of 0.3 percent in April.

Excluding volatile food and energy prices, May PPI is forecast up 0.1 percent month to month, matching April's 0.1 percent gain, according to economists polled by Reuters.

The headline number for May's Consumer Price Index is seen up 0.3 percent month to month, after April's reading of no change. Excluding food and energy, May CPI is forecast up 0.1 percent, after a 0.3 percent rise in April.

Housing starts are seen rising to a seasonally adjusted annual rate of 490,000 units in May from April's pace of 458,000 units, while building permits are expected to rise at a pace of 500,000 units, compared with 498,000 in April.

"That's going to be an important number because we want to see a stabilization in the housing area and an improvement there, so anything that has to do with existing or new starts is critical," Mendelsohn said.

May industrial output, meanwhile, is expected to drop 0.9 percent month to month, the Reuters poll showed. Capacity utilization, or the operating rate of U.S. factories, utilities and mines, is seen slipping to 68.4 percent in May from 69.1 percent in April.

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