Wall Street to watch inflation data closely

After a jump in Treasury yields fueled a long-anticipated stock retreat last week, Wall Street will be watching upcoming inflation data to see if its interest rate jitters were justified.

Analysts are split on whether the climbing 10-year Treasury note yield poses a genuine threat of a rate hike by the Federal Reserve or whether its rise above 5% has simply been an excuse for investors to lock in profits before resuming the stock market’s record-breaking run.

A key factor in deciding whether Wall Street regains its footing or stumbles will be this week’s reports on producer and consumer costs and whether they suggest that inflation is rising fast enough to set a tightening policy back into motion. The Fed has kept the benchmark interest rate on hold at 5.25% since last summer after about two years of gradual increases.

The Labor Department’s producer price index, scheduled to be released Thursday, is expected to have risen 0.5%, lower than April’s 0.7% gain, according to the median estimate of economists surveyed Friday by Thomson Financial.

Economists, however, predict that the core PPI, which strips out food and energy prices, will have increased 0.2%, up from a flat reading in April.

The consumer price index -- the more closely watched indicator, which will be released Friday -- is expected to have ticked up 0.6%, compared with 0.4% in April. The core CPI is expected to have advanced 0.2%, the same as in April.

Last week, the Dow Jones industrial average dropped 1.78%, the Standard & Poor’s 500 index fell 1.87% and the Nasdaq composite index lost 1.54%. The Dow and S&P; 500 had closed at record highs last Monday.

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At a glance

Today

Treasury bill auction.

Tuesday

Treasury reports on federal budget.

Quarterly earnings report due from Lehman Bros. Holdings.

Wednesday

House Financial Services Committee holds hearing on consumer protection and the financial services industry.

Commerce Department reports on retail sales for May and business inventories for April.

Federal Reserve releases survey of regional economic conditions.

Thursday

Labor Department reports on producer price index and weekly jobless claims.

Freddie Mac reports on mortgage rates.

Quarterly earnings reports due from Adobe Systems, Bear Stearns, Freddie Mac and Goldman Sachs Group.

Friday

Labor Department reports on consumer price index for May.

Federal Reserve reports on industrial production for May.

Source: Times staff and wire reports