Investors stay edgy as crude oil nears all-time highs, other commodities zoom, bond yields jump.

March 12, 2005: 4:13 PM EST
By Alexandra Twin, CNN/Money Staff Writer

NEW YORK (CNN/Money) - An almost six-week long stock market rally hit a road block last week, and it's one that isn't going to be cleared any time soon: oil.

Granted, the tie between rising oil prices (and gasoline at the pump) and flat to lower stock prices is nothing new -- the stock market rallied in the fourth quarter of 2004 partly because oil prices peaked in October and began to slide.
After rising for some time, light crude peaked at a trading high of $55.67 per barrel last October 25, and more or less slid, or at least remained below that high for four months.
Until February, when worries about supply and output again drove the price higher. While investors seemed to turn the other cheek as it inched up to the high $40's, as it hit $50 again, stocks began to slide. Last week, light crude oil for April delivery closed within two cents of the
all-time trading high, and stocks tumbled.
Upbeat reads on the economy and a strong quarterly forecast from Intel couldn't propel stocks last week, because of the oil prices, analysts say. Next week may yield similar results.
"The economy is on good footing, the earnings in the first quarter are expected to be better, but I can't see anything that's going to have a big impact on the market in the short term other than the price of oil," said Stephen Leeb, president of Leeb Capital Management.
"Investors will adjust to the $55 a barrel range," Leeb said, "but if it continues to rise, it's going to upset stocks."
And prices are likely to continue rising, analysts say.
"I don't see any catalyst to bring the oil prices down right now, because of what's going on in the Middle East," said Ozan Akcin, chief investment officer at Puglisi & Co.
The inflation question
Investors have been very attuned to signs of inflation of late.
While the economic news has not consistently shown the threat of inflation, and the Federal Reserve has maintained that it will continue to raise rates at a measured pace, the surge in oil and commodities, not to mention the rise in long-term bond yields, has suggested that inflation
is a bigger concern than had been thought.
Not only has oil been rising, but other commodities too, with gold having closed its session Friday at 2005 highs and the price of copper having hit all-time highs earlier in the week.
Over time, higher inflation leads to higher interest rates, which can slow economic growth, corporate profits and ultimately hurt stock prices.
"The tradeoff and struggle in the market is the power of good earnings and the strength of the economy against the fear of higher interest rates and rising oil prices," said James Awad, chairman at Awad Asset Management. "Right now, interest rates and oil prices are winning.
Because of this focus, investors will be particularly attuned to Wednesday's weekly oil inventory report and to the OPEC meeting.
Additionally, a host of key reports are due next week on the health of the economy, including retail sales, housing, manufacturing and consumer sentiment. Some earnings begin to trickle in from a number of brokerages. But the market is bound to continue taking its cue from oil and signs of inflation in the week ahead.
"Retail sales number for February should show a slight rise," Akcin said, "and that's a potential bullish catalyst short term.
Other than retail sales, the economic reports next week are not likely to be big market movers, unless they vary dramatically from expectations.
"I don't think we'll get any big surprises in the economic news next week," Awad added. "What the market will be looking for are any clues that point to anything other than four percent GDP (gross domestic product) growth."
Key events in the week ahead
Retail sales, due Tuesday, are expected to have risen 0.6 percent in February, according to a consensus of economists surveyed by Briefing.com. Sales fell 0.3 percent in January. Sales excluding autos are expected to have risen 0.8 percent in February after rising 0.6 percent in January.
Regional reads on manufacturing are due Tuesday and Thursday. Up first, the NY Empire State index for March is expected to have risen to 20.5 from 19.2 in February.
The Philadelphia Fed index, due Thursday, likely fell to 20.2 in March from 23.9 in February.
Tuesday's business inventories report is expected to show a rise of 0.6 percent in January. Inventories rose 0.2 percent in December.
Housing starts, due Wednesday, are expected to have fallen to a 2.043 million unit annual rate in February, from a 2.159 million unit annual rate in January. Building permits likely fell to a 2.07 million unit annual rate in February, economists forecast. Permits stood at a 2.132 million unit rate in January.
Capacity utilization, due Wednesday, is expected to have risen to 79.3 percent in February, according to estimates, from 79.0 in January. Industrial production, also due Wednesday is expected to have risen 0.5 percent in February versus an unchanged read in January.
Thursday brings the report on leading economic indicators (LEI). LEI likely rose 0.2 percent in February after falling 0.3 percent in January.
Friday's key report is the University of Michigan's first read on consumer sentiment in March. The sentiment index is expected to have fallen to 95.3 from 94.1 in February.
Earnings to watch
BrokeragesBear Stearns (Research) and Lehman Brothers (Research) both report results Wednesday morning. Bear Stearns is expected to have earned $2.33 per share in the first quarter, according to tracking firm First Call, down from $2.57 a year ago.
Lehman is expected to have earned $2.13 per share, down from $2.21 a year ago.
Fellow brokerages Morgan Stanley (Research) and Goldman Sachs (Research) are due to report Thursday morning. Morgan is expected to have earned $1.13 per share, two cents more than a year ago. Goldman is expected to have earned $2.20, down from $2.50 a year earlier.
FedEx (Research) reports results Thursday. The package delivery company is expected to have earned 97 cents per share, up from 71 cents a year ago.
Nike (Research) reports earnings Thursday evening. The retailer is expected to have earned 96 cents per share, up from 74 cents a year ago.

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