U.S. stocks will face a heavy lineup of economic indicators next week and may come under pressure if any of the datapoints signal that the United States is in or headed into a recession.
The housing market, which is at the center of the economic slowdown, will get particular
attention next week. Monday's existing home sales report will be followed by the S&P/Case-Shiller Home Indexes on Tuesday. New home sales are set for release on Wednesday, the same day luxury home builder Toll Brothers reports quarterly results.
Freddie Mac is set to release its earnings on Thursday. Merrill Lynch cut its ratings on Freddie Mac and Fannie Mae on Friday to "sell" from "neutral," writing that the market is not braced for the companies to report "significant losses" on their fourth-quarter results.
"With housing numbers coming out, it's not a good thing in this market, given that they always seem to disappoint," said Owen Fitzpatrick, head of the U.S. Equity Group at Deutsche Bank Private Wealth Management, in New York. "Data just keeps pointing to the economy slowing. I think the market has to adjust expectations about earnings. They're definitely still too high and need to come down."
Other data on tap include several price indexes and growth indicators, which are key to determining whether the Federal Reserve will keep cutting interest rates as it seeks to stimulate the economy. Thursday will bring an updated report on fourth-quarter gross domestic product. And since 2008 is a leap year, February wraps up on Friday with an extra day.
The agenda for Feb. 29 is heavy, with reports due on January personal income and spending, the Chicago Purchasing Managers Index for February and the final reading for February on the Reuters/University of Michigan consumer sentiment index.
PPI AND BERNANKE ON THE RADAR
A jump in crude oil futures above $101 a barrel and a higher-than-expected reading on January consumer prices earlier in the week stirred fears that the Fed may be backed into a corner, having to choose between fostering growth or slowing down inflation.
The January reading on the Producer Price Index, set for release on Tuesday, will shed further light on the state of inflation. November and December PPI readings were revised lower on Friday on a recalculation of seasonal adjustments, but unadjusted data showed wholesale prices on a sharp ascending trend, with overall producer prices rising in 2007 year on year by the most since 1981.
Whether the Fed will continue to focus first on stimulating growth may become more clear on Wednesday and Thursday when Chairman Ben Bernanke gives his semiannual testimony to congressional committees on Wednesday and Thursday. Dallas Fed President Richard Fisher said Friday that policy-makers were faced with a "dilemma" of creating conditions for employment growth without stirring "the embers of inflation." (CNBC.com will stream the testimony live).
Outside of scheduled releases, investors will tune in for any further developments related to the subprime mortgage fallout.
RETAILERS, AIG AND SUBPRIME TIME
Wall Street will take the pulse of consumer spending with more than a half dozen S&P 500 retailers set to report quarterly results next week.
Upscale department store chain Nordstrom kicks off the earnings parade on Monday followed by RadioShack, Target, Macy's, Home Depot and Office Depot, all on Tuesday. Clothing chain Gap reports earnings on Thursday.
In a sign of the equity market's continued sensitivity to subprime-related news, the Dow and the S&P 500 erased deep losses and rallied late in the session on Friday on news from CNBC that bond insurer Ambac Financial Group could get a bank bailout by Monday or Tuesday. Ambac is facing billions of dollars of expected losses after insuring bonds liked to subprime debt and other risky assets. (What to follow with bond insurers)
Friday's rebound lifted both the Dow and the S&P 500 for the week, but all three indexes remained in negative territory for the year. For the week, the Dow gained 0.3 percent and the S&P 500 advanced 0.2 percent, while the Nasdaq slid 0.8 percent.
For the year so far, though, the Dow is down 6.7 percent, the S&P 500 is off 7.9 percent and the Nasdaq is down 13.2 percent. (Get full stats for the week and year here)
"What's going to continue to drive the markets are the anecdotal-like news coming from financial institutions on problems with all these synthetic securities that have been developed by Wall Street," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany. "We're still in the process of determining the extent of the damages to financial firms."
American International Group is one of the companies being eyed by Wall Street for signs of any more mortgage-related losses. The world's largest insurer is set to release results on Thursday. AIG said earlier this month that the size of any write-down from derivative losses was not expected to be material to the company.
The spread of the subprime mortgage crisis into other assets will be closely monitored by Wall Street. Relatively obscure auction rate securities were the latest market to suffer a meltdown as liquidity all but evaporated this week.
"The question is: Have the credit markets stabilized? If they have, equity investors should be feeling better. If the credit markets deteriorate, we may find the recent pullback in the stock market may extend 3 (percent) to 4 percent," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co., in Lake Oswego, Oregon. "Equity investors are looking over their shoulders at the credit market much more closely than people realize."
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