"We need to be cognizant that markets contain a lot of information," said Deutsche Bank's chief U.S. economist, Joseph LaVorgna. "When you get all three markets telling you the same thing — wider credit spreads, falling equity prices and surging dollar due to a flight to safety, that's a powerful message. Overlay that with a manufacturing sector that's in recession and economy that's firing on just one cylinder — and that's the consumer — you have to be concerned. I'd be a lot less worried with this market, if growth were broader."
LaVorgna said if the Fed sounds more dovish after its meeting next week and some of the important upcoming data show improvement that would help markets. "If the Fed relents, energy stops falling and there's any kind of bounce, we could kind of muddle through this year. ... That's a plausible story. That's my baseline. We would need some good news, and right now, we just don't have it," he said. "I'm worried the data won't be compelling enough to break the fever in the markets. I'm hoping it will, but it won't necessarily and then if we continue to have tightening financial conditions, it's only a matter of time before the data weakens."
Some of the key data expected over the next two weeks include consumer sentiment, the employment cost index, durable goods and fourth-quarter GDP next week. LaVorgna expects fourth-quarter growth to be barely positive at just 0.5 percent but it should pick up to 1.5 percent in the first quarter.
In the following week, there is personal income and spending, ISM manufacturing and the important January employment report.
The Fed meets in the coming week and is expected to take no action on rates, but it will be watched for any change in tone about the economy or future rate hikes. The next two weeks are also the heaviest of the corporate earnings reporting season.
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