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Can Retail Bright Spot Make Up for Europe Gloom?

With one final shopping week to go, investors will be keeping their eye on the consumer to see how holiday sales shake out and what it might mean for the economy.

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But first, Friday’s markets will be watching developments in Europe, and the release of U.S. consumer inflation data, the only economic report of note.

Holiday sales seemed to be off to a good start after a mad dash to early sales on Black Friday weekend, but they’ve had some mixed reviews since then. The question now is whether they will beat expectations, like so many economic indicators have done lately.

The National Retail Federation Thursday raised its forecast for holiday sales, and now expects an increase of 3.8 percent to a record $469.1 billion. Its earlier forecast was for a 2.8 percent increase.

Macy’s chairman Terry Lundgren Thursday told “Mad Money” host Jim Cramer that his stores are doing great, even without the cold weather that drives big-ticket winter apparel sales.

“In our case, you don’t need cold weather to buy watches and shoes. We’re having one of the best years and back-to-back two years in a decade. Things are going very well and that’s without cold weather. A little cold weather would be an extra boost for us,” he said.

What to Watch

Investors are also following Congressional progress on legislation that would extend the payroll tax cut and keep the government running. Senate leaders Thursday were more optimistic that a compromise would be reached.

In Europe on Friday, the Italian parliament will hold a confidence vote on Prime Minister Mario Monti’s austerity plan.

“I think the chances are the confidence vote will pass and the austerity budget will go through. But we’re just marking time,” said Boris Schlossberg of GFT Forex.

“Although we had a better day in the euro zone credit markets, yields are far from their pre-crisis level. If yields don’t compress back to their pre-crisis levels, the mountain of additional debt service just to maintain European debt levels will offset any savings made by austerity. To me, that’s the big story they still have not resolved,” Schlossberg said.

U.S. CPI is released at 8:30 a.m. Friday and is expected to be unchanged.

Some U.S. economic data Thursday was better than expected, including weekly jobless claims which came in at 366,000. The Philadelphia Fed survey showed a surprise increase to 10.3 in December, from November’s 3.6. The index, which measures regional manufacturing activity, contracted during the summer but has been rising for three months now.

U.S. stocks finished higher, helped by the positive data. The lack of negatives out of Europe Thursday also allowed the euro to rebound slightly and regain the key 1.30 level.

The Dow was up 45 points at 11,868, and the S&P 500 gained 3 points to 1,215.

Wells Fargo Advisors chief macro strategist Gary Thayer said it’s possible stocks could move higher into the year end. Many analysts had expected a year-end Santa rally, but the market has been held hostage by the troubles in the euro zone and the weakening euro. The S&P 500 has had a more than 80 percent correlation to the euro over the past 60 days.

“I do think we’ll do a little better as we head into year end,” Thayer said, noting a lot of negatives are already built into the market.

“We had the market up and down and kind of volatile for several months. I think we’re in one of those periods where investors are waiting for some kind of proof. We’re seeing progress but not proof that things are getting better. Until we get the proof, markets will be choppy,” he said.

Thayer said the improvement in jobless claims, to the best level in 3-1/2 years, was a positive. “We’re pleased with the trend. Clearly, this is a positive sign for the economy. Last summer, when we had that shock to confidence, there was a lot of skepticism about our economy. Clearly, the numbers showed the economy is more resilient than a lot of people thought.”

Hot IPOs

Michael Kors shares Thursday jumped 21 percent on its first day of trading. The question now is whether Zynga will be a zinger, after getting mixed reviews, but ultimately pricing at $10 a share — the top of its range.

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.