Investors are hoping the coming week brings some answers to the question of whether an improving U.S. economy unleashes inflationary forces, and one place to look will be in the June payrolls data.

At the same time, the potential for defaults in subprime loans to spill over to the general economy remains a concern. Nervousness over the availability of financing for buyouts prompted investors to sell banks' and brokers' shares on Friday, which helped cut short a morning rally.

In the holiday-shortened week, the most significant data, the June payrolls report, comes on Friday. U.S. financial markets will be closed on Wednesday, July 4, for the Independence Day holiday.

A month earlier, investors were cheered by news that nonfarm payrolls grew by 157,000 in May. According to the median forecast in a Reuters poll of economists, nonfarm payrolls added 120,000 jobs in June.

Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, expects the June non-farm payrolls to show growth of 120,000 to 130,000 jobs.

I think the economy is still chugging along and the consumer is in pretty decent shape, Dwyer said. He says that with decent economic fundamentals, no recent announcements of major layoffs, and signs that manufacturing is picking up, the payrolls report should be at or a little better than the consensus.

Other data during the week includes a pair of reports from the Institute for Supply Management. The group has a report on manufacturing activity in June coming on Monday, and another on the services sector due on Thursday.

The Reuters survey forecasts that ISM's June index of national factory activity will be unchanged at 55.0.

The ISM services index is expected to decline to 58.0 from 59.7 in May.

Al Kugel, chief investment strategist at Atlantic Trust in Chicago, noted that some recent data from regional Federal Reserve banks has been good. He said he expects the ISM data to be strong.

People need some new information to become more bullish and the ISM could be the trigger, he said.


The U.S. stock market turned in a strong performance for the second quarter, but lately seemed to hit a wall as bond yields climbed above 5.0 percent and problems surfaced at certain hedge funds that held investments in subprime loans.

For the second quarter, the Dow jumped 8.5 percent, the S&P 500 rose 5.8 percent and the Nasdaq gained 7.5 percent.

After losing ground on Friday, the Dow Jones industrial average finished the week up 0.4 percent, the Standard & Poor's 500 Index inched up 0.05 percent and the Nasdaq Composite Index gained 0.6 percent.

In the week ahead, Tuesday will bring its fair share of numbers. A government report on May factory orders is due that day, along with reports from manufacturers on car and truck sales in June.

After a lull next week, S&P 500 companies' earnings begin to trickle out the following week and then the quarterly deluge begins later in July.

Bob Millen, co-portfolio manager of The Jensen Portfolio, a $2.3 billion mutual fund, notes that S&P 500 earnings growth is down significantly from the double-digit readings of a year ago. He says price-to-earnings multiples are unlikely to expand, and he argues that companies generating significant revenue from outside the United States are the best bets now.


Referring to the problems in subprime debt, which have devastated some hedge funds that made heavy bets in the sector, RiverSource Investments chief market strategist David Joy said he believes that it's the primary preoccupation of equity investors and that is going to continue next week.

The issue is: 'Does it result in a tightening of lending standards that could spill over into a general credit tightening?' That's the biggest concern.

News of a probe into two Bear Stearns Cos. hedge funds heavily invested in subprime mortgages added to investors' worries on Friday that the potential fallout could spread throughout the banking industry. One company, privately held Bombardier Recreational Products, was forced to postpone a bank loan. And another company, ServiceMaster, delayed pricing of a $1.15 billion high-yield bond offering until Monday afternoon.

As for the week's statistics, Joy said he will be watching the average hourly earnings figure that is included with the payrolls data, as well as the data on prices paid in the ISM reports.

Our view is that inflationary pressures are probably going to increase in the second half of the year but at a modest rate as the U.S. economy picks up steam, Joy said.

(Additional reporting by Jennifer Coogan)