Market may need to see oil prices ease for stocks to rise

WITH oil prices pushing new record highs, Wall Street analysts say the market may need to see an easing of that pressure for stocks to rise this week.

"The market as far as stocks are concerned it's been amazingly resilient in the face of some very bad news, particularly about oil prices," said Michael Metz, chief investment strategist at Oppenheimer & Co., of New York.

Even after oil closed at $66.80 a barrel on the NYMEX on Friday, up $4.49 for the week, the blue-chip Dow Jones Industrial average and broader Standard & Poor's 500 index managed to hold mild gains for the week.

But given that rising crude prices eat into consumer discretionary spending and drive up corporate costs such as energy and chemical raw materials, Mr Metz questioned how much longer investors could shake off the surge in oil prices.

"If we do have oil prices at this level for another week or so, it's going to make investors reconsider the whole outlook for consumer demand, which of course has been the real fuel for the economy," Mr Metz said.

Analysts will also be watching key government reports on inflation the Consumer Price Index, due out tomorrow and the Producer Price Index, to be released Wednesday for any sign of how much longer the Federal Reserve will continue raising interest rates.

The Fed on August 9 raised its benchmark funds rate for the 10th time, to 3.5%. The policy-setting board has been raising rates since June, 2004, with an eye towards preventing the economy from overheating and keeping inflation in check.

Labour Department figures are expected to show that, in July, the prices of goods paid for by consumers rose 0.2%, and by businesses 0.1%, factoring out volatile food and energy prices, according to economists polled by Reuters.

"There have not been any big blips in inflation [so far this year]," said Ernie Ankrim, chief investment strategist at the Russell Investment Group, of Tacoma, Washington. That has allowed the Fed to stick to its pace of quarter-point rises.

But if either the CPI or PPI figures showed inflation grew at a much faster-than-expected rate, as little as 0.2% or 0.3% ahead of forecast, that could be a sign the Fed would extend or even accelerate its pace of rate increases, which would take a toll on stocks.

Higher rates are typically negative for stock prices since they raise the cost of borrowing for people and companies.

Meanwhile US companies are coming to the end of their flurry of second-quarter earnings reports and have generally topped Wall Street's expectations so far this quarter.

Of the 457 companies in the Standard & Poor's 500 index that have reported results so far, 83.4% met or beat analysts' forecasts, according to Reuters Estimates.