Stocks to watch bad home loans, CPI

NEW YORK (Reuters) - Troubles in the subprime mortgage sector could put Wall Street on edge this week just as investors look for key economic data, including the Consumer Price Index, to shore up the market’s nascent recovery after its recent plunge.

Fanning concerns about the sector that lends to home buyers with poor credit is this last week's precipitous slide in the stock of New Century Financial Corp. NEW.N amid fears that the lender could file for bankruptcy protection.

The subprime lender said on Thursday it had stopped accepting new loans. Even after saying it had lined up $265 million in funding, New Century disclosed it was negotiating for further relief.

Investors worry that fallout from rising loan defaults in the subprime market could hurt consumer confidence as lenders tighten credit amid the housing slowdown.

Wall Street keeps a close watch on the moods and habits of consumers because their spending is a key driver of U.S. economic growth and corporate profitability.

“The worst thing that could happen to any economy is the loss of confidence,” said Med Yones, president of the International Institute of Management, an economic research and forecasting group in Las Vegas.

He said the bursting of the real estate bubble and high consumer debt were a major worry and “if people started to think there may be a lot of bankruptcies (in the subprime lending market), then you’re going to see the stock market sell off.”

SUBPRIME TIME

This week could give Wall Street more insight into the extent of the subprime lending woes as Goldman Sachs Group Inc. GS.N, Lehman Brothers Holdings Inc. LEH.N and Bear Stearns Cos. Inc. BSC.N are due to kick off the quarterly earnings reporting season for big investment banks this week.

Wall Street’s big banks buy mortgages from lenders and package them into mortgage-backed bonds.

“The possibility of (New Century) declaring bankruptcy is certainly raised by what they said” last week, said Michael James, senior trader of regional investment bank Wedbush Morgan, in Los Angeles.

“I think the potential fallout from what might happen with New Century over the weekend and its effect on the fixed-income market are certainly part of the” worry, James added.

On Friday, stocks finished mixed as concerns about the subprime mortgage market took a toll and curbed some of the optimism created by February’s healthy jobs data.

For the past week, all three U.S. stock indexes rose: The Dow Jones industrial average .DJI gained 1.34 percent, the Standard & Poor's 500 .SPX advanced 1.13 percent and the Nasdaq Composite Index .IXIC rose 0.83 percent. Both the Dow and the S&P 500 broke a two-week losing streak.

AN INFLATION SNAPSHOT

Besides fretting about housing woes, investors will brace themselves this week for a barrage of economic data that could yield crucial clues about the health of the U.S. economy and the future direction of U.S. interest rates.

The week’s most closely watched report is likely to be the Consumer Price Index for February, due on Friday. Economists polled by Reuters forecast an increase of 0.3 percent in February’s overall CPI, after January’s 0.2 percent gain.

Excluding volatile food and energy prices, February’s core CPI is seen up 0.2 percent. In January, it rose 0.3 percent.

A preliminary look at March consumer sentiment will be provided on Friday by the Reuters/University of Michigan Surveys of Consumers. The consumer sentiment index is forecast to dip to 90.0 in March from 91.3 in February.

The Federal Reserve’s February report on industrial production and capacity utilization is also on Friday’s data menu. The Reuters poll forecast: Industrial production, up 0.2 percent after January’s decline of 0.5 percent, and capacity utilization is pegged at 81.3 vs. 81.2 previously.

On Thursday, Wall Street will get the U.S. Producer Price Index for February, which measures wholesale prices. The forecast: Overall PPI, up 0.5 percent in February, after January’s 0.6 percent drop. Core PPI is forecast to rise 0.2 percent in February, matching January’s gain.

With inflation on Wall Street's mind, investors will still keep track of oil prices. On Friday, NYMEX April crude CLJ7 ended at $60.05 a barrel, down 2.6 percent for the week.

On Tuesday, February retail sales are due. The Reuters poll showed economists forecast a gain of 0.3 percent in retail sales, both including and excluding auto sales.

On Monday, Federal Reserve Board Governor Randall Kroszner is scheduled to speak on “Inflation Dynamics” at a conference for the National Association for Business Economics.

NOT FOR THE FAINT OF HEART

Last week marked Wall Street’s attempt to reverse a slide it suffered a week earlier, which began when China’s main stock index suffered its biggest drop in a decade. Investors sold stocks as a dwindling appetite for risk and concerns about economic growth triggered a flight into safe-haven assets like government bonds, wiping out the stock market’s 2007 gains.

The rebound has been punctuated by rising volatility, raising doubt about its sustainability.

But money managers and analysts said longer term, the stock market is still poised to rise this year as share valuations fall into line with expectations.

“Over time, you have to realize that the reason you get superior returns in the market is because you have to endure higher volatility. That’s the price of admission,” said Rafael Resendes, co-founder and president of The Applied Finance Group, a capital market research and consulting firm in Fresno, California.

“For the investors, I would say nothing has changed, except maybe you re-evaluate your asset-allocation scheme, maybe buy more on the dips,” Resendes said. “But for a trader, obviously, there’s going to be a lot of opportunities that arise as the market readjusts and gets used to a world of higher volatility.”

And speaking of volatility, Friday marks the quarterly expiration and settlement of four different types of March futures and options contracts -- a convergence known as quadruple witching.

Fasten your seat belts.