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Soft manufacturing data won't sway the Fed

Softish ISM data and super strong auto sales Tuesday could paint a mixed picture of U.S. manufacturing, which continues to suffer.

Stocks start off December, following a flat performance in November despite volatile swings. The S&P 500 was up just 0.05 percent for the month, finishing at 2080 Monday, and it is up 1 percent for the year. Other markets saw more dramatic moves in November, with West Texas Intermediate oil futures down 10 percent and the dollar index up 3.4 percent.

ISM manufacturing data Tuesday should show a slight gain to 50.5, reflecting expansion but just barely. On the other hand, vehicle sales should be gangbusters — at a total annual selling pace above 18 million for a third month, the longest stretch ever at that rate.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

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"Clearly the manufacturing sector is struggling right now between the weakness overseas and the strength of the currency," said Stephen Stanley, chief economist at Amherst Pierpont Securities.

As for vehicles,

"It sounds like it was another big month, 18-million-plus, which would be a third in a row. That's amazing," Stanley said. "Maybe that's one bright spot for manufacturing. Autos have been very good in the last few months, and it seems like they were good enough in November. I think that's going to help propel consumer spending in the fourth quarter."

Stanley said the weakness in other parts of manufacturing will not deter the Fed, which appears set on hiking rates Dec. 16. He said the most important events of the week should be a speech and testimony from Fed Chair Janet Yellen Wednesday and Thursday, respectively. Even Friday's November jobs report is not likely to be a factor that could change the Fed's course, he said.

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"The way the calendar lines up with the way she scheduled these things before the payroll numbers is that they're not hanging by a thread here. She expected it to be a pretty compelling case in December and nothing we've seen between the October meeting and now would push them off of that," Stanley said.

Besides ISM Manufacturing, there is also construction spending, both at 10 a.m. ET. Monthly vehicle sales are reported by individual manufacturers.

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"The service sector in this economy is just cranking it. It generates somewhere typically about 85 to 90 percent of job growth…that's what really matters," said Ward McCarthy, chief financial economist at Jefferies. "When you look at manufacturing the transportation sector is doing fine. We make a lot of cars. We make a lot of airplanes and we manufacture a lot of things that support these two activities but the rest of it is hurting."

McCarthy said for instance that energy, which is has been hit hard, is a drag on capital spending and related industries, but in terms of headcount it is a relatively small contributor. He expects the ISM Non-manufacturing data to be slightly below October's 59.1, when it is reported on Thursday.

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Other than data, traders will be watching Fed speak. Chicago Fed President Charles Evans speaks at 12:45 p.m. on the economy and monetary policy.

World leaders continue to meet in Paris for the second day of the UN Climate Change Conference.