THE WEEK AHEAD: Microsoft reaction, Fed watch ahead

Technology stocks managed to make solid gains this week despite some disconcerting economic reports showing the economy continues to fire at an unprecedented pace. Next week, investors will digest the latest salvo in the Microsoft circus as well as some minor earnings reports.

For the week, the Dow Jones industrial average fell 111 points to 10,733.91. The Nasdaq composite moved up 217 points to finish at 3,860.67.

Earlier this week, the Commerce Department said March personal income rose 0.7 percent while spending notched up 0.5 percent -- the smallest increase in consumption since July 1999. Economists polled by Reuters had been forecasting a 0.6 percent boost in both figures.

But personal spending in February was revised to reflect a greater-than-expected consumption spree, up 1.4 percent compared with the 1.0 percent reported earlier.

"It just says that things are ripping along," said Harvey Hirshhorn, Stein Roe and Farnham chief economist and investment strategist. "Consumers still have great momentum going."

More disconcerting was the Labor Department's Employment Cost Index figures for the first quarter. The ECI, which measures what employers pay in wages, salaries and benefits, rose at the fastest pace in more than 10 years. The index jumped 1.4 percent, much higher than the 0.9 percent rise expected by economists polled by Reuters.

At the same time, the Commerce Department said U.S. Gross Domestic Product, or GDP, for the first quarter increased 5.4 percent, slightly less than the 5.9 percent boost anticipated. But the key GDP deflator, a wide gauge of price pressures in the economy, grew by 2.7 percent. Economists had expected a 2.2 percent boost.

The strong figures increased the chance that the Federal Reserve will opt for a more aggressive hike in borrowing costs than the anticipated quarter of a percentage point, analysts said.

Merrill Lynch agreed. The firm's chief economist, Bruce Steinberg, said he now expects the Fed to tighten by 50 basis points when policy-makers meet May 16.

"The only caveat is the performance of the equity market between now and then," Steinberg said in a research note. "If the market tanks, the Fed may hold its move to 25 basis points."

Speaking of tanking, one can only wonder what Microsoft shares will do in the wake of Friday's break-up proposal from the Justice Department.

Looking ahead to next week, the barrage of technology earnings reports dwindles to a trickle with only a few significant firms left to report.

Expedia Inc. (Nasdaq: EXPE), Microsoft's online travel site, is expected to post a third-quarter loss of 57 cents a share.

In its latest quarter, Expedia posted
better-than-expected results, losing $5.9 million, or 16 cents a share, on sales of $17.8 million.

Breakaway Solutions (Nasdaq: BWAY) will also check in with its first-quarter results.

Analysts surveyed by First Call Corp. expect it to lose 6 cents a share.

Last quarter, it lost $2.6 million, or 15 cents a share, on sales of $10.6 million.

Also keep an eye out for S1 Corp.'s (Nasdaq: SONE) results.

The company, formerly known as Security First, will reported its first-quarter results with analysts expecting a loss of $2.26 a share.

In its latest quarter, S1 posted a loss of $117 million, or $3.50 a share, on sales of $40.4 million.