Inflation, spending data are focus as investors feel calmer

new york -- Wall Street heads back to work this week in a somewhat calmer state of mind.

Overall, investors are more optimistic now about the financial markets than they’ve been in several weeks.

An interest rate cut from the Federal Reserve is far from guaranteed, but after the central bank lowered its discount rate Aug. 17 -- a rate that several major banks took advantage of -- Wall Street believes it can rely on the Fed as a safety net.

The market had its most stable week in a month last week. The Dow Jones industrials rose back above 13,300 after momentarily dipping below 12,600 in the prior week. The Dow finished up 2.3% for the week, the S&P; rose 2.3% and the Nasdaq added 2.9%.

Meanwhile, the yield on the three-month Treasury bill recovered to a more reasonable 4.23% after briefly falling under 3% Aug. 20 as nervous investors fled to the safety of short-term government securities.

Though some say the worst is over for stocks, that the underlying strength in the economy and corporate America will help the market overcome any credit troubles, others argue things will get more difficult before they get better.

Worries about tightening credit haven’t disappeared, with the housing market looking dismal and certain types of assets still hard to sell -- such as asset-backed commercial paper, normally an easy way for companies to get cash.

It’s possible that without a rate cut from the Fed, stocks could tumble further. Traders are betting on the Fed cutting the benchmark fed funds rate at its Sept. 18 meeting or sooner, but many economists say the central bank -- which has held rates steady for more than a year -- is unlikely to waver.

Wall Street could get some insight into the Fed’s thinking Tuesday when the central bank releases minutes from its last meeting.

On Aug. 7, policymakers held rates steady and said that although tight credit and the housing market might drag on the economy, inflation was the primary risk.

Investors will also be focusing on the Commerce Department’s Friday report on personal income, personal spending and core personal consumption expenditures.

Personal income is expected to tick up 0.3%, spending is expected to rise 0.4%, and the year-over-year inflation gauge is anticipated to register at 2%, slightly above last month’s reading of 1.9%.

Investors will have a lot of economic data to sift through this week.

Wall Street will be reading two snapshots of the slumping housing market: today’s National Assn. of Realtors’ report on sales of existing homes, and Tuesday’s S&P;/Case-Shiller home price index.

Existing-home sales are expected to have held fairly steady in July, according to the median estimate of economists surveyed Friday by Thomson Financial, after dropping in June to the slowest rate in nearly five years.

The market will also get two readings on August consumer sentiment this week -- one Tuesday from the Conference Board and one Friday from the University of Michigan.

Economic growth will be in focus as well.

On Wednesday, the Commerce Department releases its second estimate of second-quarter gross domestic product. Economists forecast that GDP growth will register at 4%, a faster pace than the department’s July estimate of 3.4%.

And on Friday, the Chicago Purchasing Managers releases its manufacturing index, which is expected to show modest expansion.

The Chicago PMI is a precursor to next week’s closely watched national manufacturing index from the Institute for Supply Management.

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At a glance

Today

National Assn. of Realtors reports on existing-home sales for July.

Treasury bill auction.

Tuesday

Conference Board reports its monthly consumer confidence index.

Quarterly earnings report due from Borders Group.

Wednesday

Quarterly earnings reports due from TiVo and DaimlerChrysler.

Thursday

Commerce Department issues preliminary report on gross domestic product for the second quarter of 2007.

Labor Department reports on weekly jobless claims.

Freddie Mac reports on mortgage rates.

Quarterly earnings reports due from Dell, Freddie Mac, H&R; Block, Tiffany and Zale.

Friday

Commerce Department reports on July personal income and spending and factory orders.

Source: Times staff and wire reports