Traders will be searching for any signs the economy and job market are really kicking into higher gear, as Friday's jobs report suggests.
November saw the strongest employment gains in 35 months, and the market instantly re-priced expectations for the first interest rate hike for June from September. That was also the timing mentioned by New York Fed President William Dudley in comments earlier in the week.
So, markets in the week ahead will be adjusting to the idea that the Fed is beginning to get the confirmation it needs to start normalizing monetary policy. Bond strategists expect to see a bias toward higher rates, and stock traders are watching to see if the will cross the 18,000 threshold —a big round psychological number just 42 points away from Friday's closing level.
Economic data in the week ahead includes job opening and turnover data Tuesday; retail sales on Thursday and PPI and consumer sentiment Friday. There are a handful of earnings, including Costco and home builders Hovnanian and Toll Brothers.
The Dow rose 0.7 percent to a record 17,958 in the past week, and the S&P 500 rose 0.4 percent to 2075. The Nasdaq was down 0.2 percent at 4780.
James Paulsen, chief investment strategist at Wells Capital Management said he expects the Dow to reach 18,000 soon. It crossed 17,000 for the first time on July 3. "My guess is we'll get there," he said.
"But it won't go a lot higher than that, and we pull away before the end of the year," he added. "I think [the] jobs report has moved up the time table for the Fed, so good news might start be bad news."
Some Fed watchers have been expecting a June rate hike, but there are many expecting a third quarter hike and some even expecting it in the fourth quarter.
There's also a small camp that expects a first quarter hike because they view the economy as being stronger than the Fed does. These diverging views will move closer together, as data either supports or refutes the view the economy is getting stronger. That could impact the markets.
"I think the Fed is going to move in June. I think they're setting it up—including with some of the comments this week that are suggestive of the fact that we're moving to easy policy as opposed to excessively easy policy," said Rick Rieder, BlackRock chief investment officer of fundamental fixed income.
The Treasury yield curve flattened Friday amid expectations for an earlier rate hike, with a sharp move up in the 2-year note yield to 0.63 percent, a 3-year high. There was a lesser move in the 10-year yield to 2.30 percent. The dollar continued to gain on a stronger U.S. economy and the was 1 percent higher on the week at 89.39, an eight-year high.
Rieder said the 10-year could move into the 2.75 —2.80 range. "We think the 5-year could be up 75 basis points as we get into 2015," he said.
CRT Capital chief Treasury strategist David Ader said the market will look to all stronger data through the prism of what it could mean for the timing of Fed rate hikes. He also said the market is looking to the Fed altering some of the language in its statement that discusses keeping rates low for a considerable time.
Ader expects the market to build a concession ahead of the auctions Tuesday to Thursday of $69 billion in 3-year and 10-year notes and 30-year bonds. He said the 2.40 level on the 10-year yield tends to draw in buyers.
"The auctions will go okay, maybe a little sloppy," he said. "I would say the stronger the data is now, the more we're trying to bring forth Fed rate hikes."
Markets will focus on key global economic reports this week, starting with Chinese trade data and labor market conditions Monday. Chinese inflation data is Wednesday and retail sales and industrial production Friday. There is also industrial production data from the euro zone expected.
"The Fed has a favorable window to do it because the European Central Bank, the Bank of Japan and the Peoples Bank of China are all easing," said Rieder. That could help keep long end rates contained, because investors should find the U.S. Treasurys a better bet relative to foreign sovereigns, as they have been, he said.
Perhaps the most important U.S. report will be retail sales, as investors try to sort out what's happening with holiday sales. So far, the results have been uneven in some of the preliminary reports.
"Of course, auto sales were very strong. The evidence of more chain store sales are sort of middling. You'd have to think with job growth accelerating and gasoline coming down, the environment is very good for consumer spending," said J.P. Morgan economist Robert Mellman. Mellman said he expects a 0.4 percent gain in core retail sales, which exclude cars, gasoline and building materials.
U.S. oil futures were down a half a percent in the past week to $65.84 per barrel, a five year low. Gasoline futures were down nearly 3 percent to $1.77 a gallon.
Earnings: Vail Resorts, H&R Block, Diamond Foods, Pep Boys
12:30 p.m.: Atlanta Fed President Dennis Lockhart
Earnings: AutoZone, Krispy Kreme, Burlington Stores, HD Supply
7:30 a.m.: NFIB survey
10:00 a.m.: Wholesale trade
10:00 a.m.: JOLTs
1:00 p.m.: $25 billion 3-year note auction
Earnings: Costco, Hovnanian, Toll Brothers, Lands' End, Vera Bradley, Men's Wearhouse
1:00 p.m.: $21 billion 10-year note auction
2:00 p.m.: Federal budget
8:30 a.m.: Initial claims
8:30 a.m.: Retail sales
8:30 a.m.: Import prices
10:00 a.m.: Business inventories
1:00 p.m.: $13 billion 30-year bond auction
8:30 a.m.: PPI
9:55 a.m.: Consumer sentiment