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Week Ahead: Markets Turn Their Focus to the U.S.

After being whipped around for weeks by developments in Europe, markets may turn their attention to the U.S. and what appears to be an improving economy, for now.

NYSE trader
Oliver Quilla for CNBC.com
NYSE trader

The coming week promises to be the busiest before the year end. The Fed meets Tuesday though it is not expected to take any action. There is also a series of important economic reports, including November's retail sales data Tuesday, weekly jobless claims Thursday and producer and consumer inflation data Thursday and Friday.

Several major companies — including General Electric and Honeywell — meet with investors Tuesday and Thursday, respectively. FedEx, an economic bellwether, and retailer Best Buy , report earnings.

Internet company Zynga is expected to go public, one of a dozen companies hoping to issue stock in what could be the most active IPO week in four years.

Stocks ended the past week in rallying mode, after most of the European Union's 27 leaders agreed to a framework for a closer fiscal union that would allow for a central budget authority and sanctions if budgets aren't balanced. Britain, not a member of the smaller group of euro zone countries, refused to support the plan, but all of the countries using the euro are expected to proceed.

Despite continued uncertainty about bailout funding and disappointment with the role of the European Central Bank, investors drove stocks sharply higher Friday and the euro firmed against the dollar. It was still down 0.75 percent for the week at 1.3385.

"I think you'll know a lot by Tuesday and Wednesday on the true reaction to Europe. We had a better rally here, but most of the European markets didn't get back most of their losses (from Thursday's selloff). That makes me a little suspicious," said Art Cashin, director of floor operations at UBS. One of the concerns is that Standard and Poor's or other rating agencies could downgrade some of Europe's sovereigns.

"I'd love to see Santa get going," he said, referring to a traditional late year "Santa rally." "But if you read around, everybody's kind of critical about Europe...Whose right? The experts or the market?" Cashin expects the triple witching expiration of futures and options to make for volatile trading in the coming week.

The Dow jumped 1.6 percent Friday, giving it a 1.4 percent gain for the week to 12,184. The S&P 500 was up 0.9 percent for the week, finishing at 1255.19. The S&P is basically flat for the year-to-date, down 0.19 percent. The Dow, meanwhile has gained 5.2 percent for the year.

Whither Stocks

Larry Kantor, Barclays Capital head of research, said he believes the U.S. market has decoupled from global equities markets. While the key U.S. indices are holding their own after months of volatility, most stock markets around the world show big losses. For instance, German stocks are down 13.4 percent for the year so far; Brazil is down 16 percent; Shanghai is down 17.6 percent; Australia is down 12 and Japan is down 16.6 percent.

"I think the U.S. data getting better will help the U.S. stock market. I think the better data in the U.S. has a little more legs. Coming into the fourth quarter, we saw a big drop in inventories in the third quarter. Relative to sales, inventories looked really low. That means you're going to get some production and that's going to help GDP," said Kantor.

Kantor said even though European leaders disappointed some in the markets, it is actually a big step that the leaders were willing to give up some individual sovereignty. "Is this still going to be an issue? Absolutely. They haven't resolved the issue, but they have taken a significant step forward," he said.

Bill Stone, chief investment strategist for PNC Wealth Management and PNC Institutional Investments, said if markets are convinced the situation in Europe has stabilized, there should be a rally into the year end, as fund managers adjust their portfolios. "Our thinking on the EU decision has been that we expected this kind of two steps forward, one step back. We haven't gotten two steps in a while. It was more of a 1-1/4 step forward and one step back. I do believe we got our full two steps at this summit," he said, "It lays the foundation for a durable solution rather than these 'throw the money up against the wall and see what sticks' kind of solution."

"You can put together a pretty nice rally. I think valuations leave us a lot of room ... but on the other hand, we had a massive rally last week, and another rally this week. How much has already been paid for," he said. But while Stone and others see a possible "Santa" rally, they don't have lofty hopes for 2012. Stone expects the S&P 500 to finish next year at 1350, and Barclays this week announced a target of 1330 for the S&P for 2012.

Kantor said while he thinks stocks can go higher near term, there might be some disappointment around the Congressional discussions on the proposed extension of the payroll tax holiday. Wall Street is watching that subject carefully since the payroll tax cut could take away as much as a point from next year's GDP if it is not extended, according to some economists. "I think the data could keep being good. I think the payroll tax could offset it even if it passes because of all the rhetoric," he said.

Fed Ahead

The Fed is not expected to take any action at its one day meeting Tuesday, but Jim Caron, global head of interest rate strategy at Morgan Stanley, believes it will lay the ground work for a change in communication policy in January.

"Effectively, what they're having is diminishing returns in terms of quantitative easing. You had QE1 that affected asset prices; QE2 prevented deflation, and you now have "operation twist," and the jury is still out," he said. The "QE" or quantitative easing programs involved the Fed's purchase of assets, which increased the size of its balance sheet. "Operation twist" is a program under which the Fed is purchasing longer duration Treasurys and selling the short end, without any change in the size of its balance sheet.

Caron said by changing its communications strategy, the Fed believes it could affect market behavior. "The change would be an attempt to reflate asset prices while reducing risk premiums in order do achieve easier financial conditions," he notes.

The Fed, when it does move to change its communication strategy, could, for instance, emphasize that it expects to keep the Fed funds rate at zero for the next two years and add language that says what it would consider in order to change that.

The Fed would expect the markets to respond to that by reflating asset prices, like stocks, knowing the Fed is on hold. "That will effectively allow the markets to understand that they are going to stay easing longer, until they get what they want, which is an improvement in financial conditions," said Caron.

Caron expects the Fed to eventually announce another round of quantitative easing, which would involve the purchase of mortgage securities sometime at the end of the first quarter or beginning of the second quarter.

Zane Brown, head of fixed income strategy at Lord Abbett, also does not expect the Fed to take any action Tuesday, but he also expects it to move toward increased transparency later on. He said this week he will continue watching Europe and U.S. data, including the retail sales for November and jobless claims.

In the past week, jobless claimswere reported at 381,000, the lowest level since February. Other data was also positive in the past week, including a surprising improvement in consumer sentimentto its highest level in six months. Trade data also improved in the past week encouraging Goldman Sachs to raise its fourth-quarter GDP forecast to 3.4 percent.

"People have been excited recently about hopes that the employment picture is starting to improve ever slightly ... even the weekly claims number will be a focal point. Also retail sales will continue to indicate whether or not consumers will spend. There's concern that they've spent to the point where savings rates have declined to 3.5 percent ... over the past three years it been between 4 and 6 percent," Brown said.

"But that could suggest people are less concerned about losing their jobs," he said.

What Else to Watch

OPEC meets in Vienna Wednesday, and analysts do not believe it will agree to a new quota this week. The meeting comes six months after its last meeting dissolvedwith Saudi Arabia losing a proposal for an increase in output to make up for lost Libyan supply. Saudi Arabia declared it would pump more.

Former MF Global CEO Jon Corzine will testify again before Congressional committees Tuesday and Thursday.

Monday

0100 pm $32 billion 3-year note auction

0200 pm Federal budget

Tuesday

Earnings: Best Buy, FactSet

0730 am NFIB small business survey

0830 am Retail sales (Nov)

1000 am Business inventories

1000 am JOLTS survey

0100 pm $21 billion reopened 10-year note auction

0215 pm FOMC decision

Wednesday

OPEC meets in Vienna

Earnings: Joy Global, Verifone

0830 am Import prices (Nov)

0100 pm $13 billion reopened 30-year bond auction

0830 am Atlanta Fed President Dennis Lockhart speaks in Atlanta

Thursday

Earnings: FedEx, Research in Motion, Discover Financial, Pier One, Rite Aid, Adobe Systems, Accenture

0830 am Initial jobless claims

0830 am PPI

0830 am Empire State survey

0830 am Q3 Current account

0900 am TIC data

1000 am Philadelphia Fed survey

0100 pm $12 billion 5-year TIPS auction

0320 pm Atlanta Fed's Lockhart speaks in Atlanta

0430 pm Fed balance sheet

0430 pm Money supply

Friday

0830 am CPI

1200 pm Dallas Fed President Richard Fisher speaks on the economy in Austin, Texas

Follow Patti Domm on Twitter: @pattidomm

Disclaimer

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.