Wall Street's rally could persist this week as investors' conviction grows that the U.S. economy is on track for a recovery. But retailers' results, CPI and other consumer data could cast a pall if shoppers fail to show signs of life.

The focus will also be on the Federal Reserve, which will release a statement on Wednesday afternoon at the end of its two-day interest rate-setting meeting. The U.S. central bank is expected to hold rates near zero, so investors will look for signals of an exit strategy from its efforts to prop up the financial system.

The government's July retail sales data as well as quarterly scorecards from major retailers, including Wal-Mart Stores Inc , J.C. Penney and Macy's , will give a snapshot of the industry and how consumer spending is faring in the recession. So far, consumers have tightened their belts and shopped mostly for just the bare necessities as worries about job security take precedence.

Encouraging U.S. manufacturing and employment data last week pushed all three major stock indexes to nine- and 10-month highs. And analysts said the enthusiasm from the better-than-expected reports should carry over into this week.

The broad Standard & Poor's 500 is up 49.4 percent from the 12-year closing low of early March after vaulting above the key 1,000 level this week.

Both the Dow and the S&P 500 finished Friday's session at 2009 closing highs. Also last week, the Nasdaq rose back above the 2,000 milestone to end on Tuesday at 2,011.31 -- its highest close for 2009.

At Friday's close, all three major U.S. stock indexes had scored a fourth straight week of gains. For the week, the Dow Jones industrial average <.DJI> rose 2.2 percent, while the S&P 500 added 2.3 percent and the Nasdaq Composite Index <.IXIC> advanced 1.1 percent.

For the year, the S&P 500 is up 11.9 percent.

The blue-chip Dow average is up 6.8 percent in 2009, while the Nasdaq is up 26.8 percent.

All the fundamentals for recovery are now aligned, said Steve Hagenbuckle, managing principal of TerraCap Partners, based in New York. He expects stocks to climb next week.

The non-farm payrolls report on Friday, in particular, boosted confidence after it showed the economy shed far fewer jobs than expected in July. While the job losses were still hefty -- 247,000 jobs disappeared last month -- the data provided the clearest signal yet that the economy was turning around.

Although last week's data offered more evidence that some of the pillars of the economy are stabilizing at a better-than-expected rate, the recovery will still be a long process.

SHOPPERS ON CENTER STAGE

Analysts said the next point of focus for economic stabilization will be the consumer, whose spending accounts for about two-thirds of the U.S. economy.

We're seeing the turning point right now, said Kurt Karl, head of economic research and consulting for North America at Swiss Re in New York.

That should feed through to the consumer psyche and that will get things rolling, but it doesn't look like a very fast- moving ball at this point.

Wal-Mart, the discount king that's also the largest retailer in terms of revenue, will be the biggest retailer reporting quarterly results this week. Investors will be keen to see if Wal-Mart benefits from shoppers looking for cheaper products.

About 140 million people walk through the doors of its 4,000 U.S. stores each week.

Other major retail names on this week's earnings calendar include Nordstrom , an upscale department store known for service, as well as teen apparel mainstay Abercrombie & Fitch and moderate-priced department store operator Kohl's Corp .

With most of earnings season out of the way, 73 percent of S&P 500 companies that have reported have beaten analysts' expectations, spurring the second leg of the market rally after stocks' sharp advance from March lows ran into a speed bump in June.

Monthly retail sales are expected to rise 0.7 percent for July, according to economists surveyed by Reuters, compared with a 0.6 percent gain in June. This U.S. Commerce Department data is due on Thursday at 8:30 a.m. EDT.

On Friday, Wall Street will get a double dose of consumer data. The U.S. Consumer Price Index for July will be released at 8:30 a.m., followed by a preliminary reading for August on consumer sentiment from the Reuters/University of Michigan Surveys of Consumers at about 9:55 a.m.

Overall CPI is forecast to remain steady in July, according to the Reuters poll, after June's 0.7 percent jump. Core CPI, excluding volatile food and energy prices, is expected to edge up 0.1 percent in July, the poll said, after June's increase of 0.2 percent.

Although inflation is not a front-burner concern right now, investors are not turning a blind eye to it, either -- not with U.S. crude oil futures prices back above $70 a barrel.

Economists look for a preliminary August reading of 68.3 on the Reuters/University of Michigan consumer sentiment index, after July's final number of 66.0.

STEADY AS SHE GOES

The Fed is expected to keep benchmark interest rates near zero when it releases its statement on Wednesday. Investors also believe the Federal Open Market Committee's comments about monetary policy will maintain the status quo.

Analysts also do not expect the central bank to announce any additional asset purchases. Instead, Wall Street will look for signs of how such moves will be wound down.

What they want to do now is start looking at an exit strategy, easing back off and letting the markets take care of themselves, said Hagenbuckle.

Other data on tap this week includes the international trade deficit for June on Wednesday; weekly initial jobless claims on Thursday, and the Fed's report on Friday on July industrial production and capacity utilization.

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