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Week Ahead: The Meat and Potatoes of Economic Data

It's back to basics for stocks in the coming week, as traders watch incoming economic data for signs that a pattern of better news continues.

Retail sales, industrial production and inflation data are all on the economic calendar, in a week where the Fed will also buy about $35 billion in Treasurys in an effort to boost the recovery. Earnings are expected from a few big retailers—Wal-mart , Lowe's , Home Depot and Target .

General Motors drives back into the stock market mid-week, with a more than 350 million share initial public offering, expected to price between $26 and $29 a share.

Wall Street sign
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Wall Street sign

Traders are also keeping a wary eye on Europe, where Ireland's fiscal woes are expected to stay in the forefront, as European finance ministers meet.

Stocks in the past week took their worst pounding in three months as a host of influences affected markets. Negatives included the G-20's criticism of U.S. policy, and the lack of accord among the group. There were also fears of rising rates in China after a hotter than expected inflation report. The peripheral European debt worries, and Cisco's earnings warning were also contributors to a sell off in a market that has climbed more than 15 percent since late August. Finally, commodities sold off.

The Dow fell 2.2 percent in the past week to 11,192 in its worst weekly decline in three months. The S&P 500 was off 2.2 percent to 1199, and Nasdaq, hit hard by tech, fell 2.4 percent to 2518.

"I think the data will be enough of a focus so we can shrug off some of these exogenous risks. The industrial production number ought to be good," said Barry Knapp, head of equities portfolio strategy at Barclay's Capital.

"..These risks, like Chinese monetary tightening and European sovereign debt, they're not an issue while things are going the right way in the U.S.," he said.

For the most part, recent data has come in better than expected, including ISM manufacturing data, the October jobs report, trade data and jobless claims.

"Everybody's looking for a pullback," said Jefferies managing director Art Hogan. "I actually think we're going to see things firming up, and we'll start debating a few things, like does the Fed have to do all the $600 billion (in quantitative easing.)"

He said stocks could regain ground if the data continues to improve, and if the discussion in Washington turns toward cooperation when Congress returns to work Monday. Congress is expected to take up the issue of the Bush tax cuts, which are set to expire at year end.

"If you look at gridlock, there's good gridlock and bad gridlock. Good gridlock is when you get cooperation and things get done," he said. Congressional Republicans are angling to extend all of the Bush tax cuts, and President Obama has said he would discuss that option though he favors eliminating tax cuts for the wealthy.

Knapp said he expects General Motors to be a positive force in the market when it goes public Thursday. "It could be a positive catalyst for the market. Some people have been talking supply and whether that's a negative for equities, but I don't think so. Supply isn't the issue. Right now, it looks like demand will be off the charts," he said.

Fed Under Fire

The Fed's image took a battering this past week, as G-20 leaders met in Korea and a number of countries expressed concerns about the Fed's quantitative easing (QE) program, and the decline in the dollar. The dollar has weakened, and stocks and commodities have risen since the Fed first suggested the program in late August.

"I'm sure the Administration wasn't expecting this type of backlash for QE2," said Stephen Stanley, chief economist at Pierpont Securities. The Fed has announced it would purchase $600 billion in Treasury securities in an effort to push down interest rates and reflate assets.

"The Fed's credibility to some degree has been damaged anyway, but the fact they've had so much blow back on QE2 from all sorts of corners is a problem. (Fed Chairman Ben) Bernanke, in particular, has staked a lot on this policy. If he doesn't get the kind of results he's looking for, it's a serious issue for the Fed,' said Stanley.

Investors will be watching for comments on the easing program when Bernanke speaks in Germany Friday to a European Central Bank Banking Conference.

The first purchase by the Fed under the controversial program was Friday, and it caused a dust up in the Treasury market as rates rose into it, opposite to the intended direction.

"This market's got volatility, and looking at the Fed purchase and what they bought and to look at he market sell off like that, is not a big sign of confidence," said Cantor Fitzgerald's Brian Edmunds.

"I think today was one of those classic kind of game the system trades. People sold aggressively in the Fed purchase. There there were willing sellers afterwards, all thinking the street was leaning long and money was coming off risk assets and other places," said Edmunds on Friday afternoon.

The Fed bought $7.2 billion securities and was offered $29 billion in the 5-year sector. On Monday, the Fed is expected to buy $7-9 billion of 5- to 7-year notes, and it will make similar sized purchases every day.

"If they continue to buy at the same size with diminishing liquidity, that same size has a bigger and bigger impact on the market," said Stanley. "I wouldn't be surprised that they have more impact as they get into December."

More Room to Run for Euro?

Econorama

Stanley disagrees with the speculation making the rounds that the Fed will be able to cut its QE program short because of the improving economy. He does, however, see improvement and will be watching retail sales Monday.

"Retail sales are set up for a good headline number. I have 0.9, most if it is autos and gasoline. The tow of those are both working toward a big headline number. I'm not sure if you exclude autos and gasoline if the number would be great, but I don't think it'll be a disaster either. As far as I can tell, the retail sector is still bobbing along, not accelerating," he said.

As far as Ireland goes, Stanley said there does not appear to be a systemic risk. "I would say the thing that we saw in early May with Greece, that would be a kind of tell tale sign. It was when we started to see difficulties in the funding markets...We haven't seen a whiff of that this time around. Until we see that I would say obviously it's a big problem for them and certainly a problem for the Euro zone but I don't think it's a problem for the U.S.," said Stanley.

Knapp said Ireland does not need funds right now. He pointed to the country's credit default swaps, as a sign the situation is not nearly as dire as Greece. "Those cds credit curves are not inverted, meaning the one-year is not above the five-year. Typically, when you're in a crisis, the one-year explodes," he said.

Dollar Dilemma

As the dollar in the past week gained 2.5 percent against the euro, and 1.4 percent against the yen. The euro was at $1.3693.

"Overall, I think there's more room to run here, particularly for the euro," said Brian Dolan of Forex.com. "The weaker growth outlook there only intensified the deficit and debt problems they have. As growth slows, revenues are going to fall short, and deficits are going to widen and that's got to make it a bigger problem for the euro."

European finance ministers meet Tuesday and they could discuss new rules for sovereign restructurings.

Dolan said he is not as concerned about Ireland, as he is about the rising concerns (and yields) in Spain. They're over 10 percent of the Euro zone GDP and a much bigger risk," he said. "They could write a check tomorrow and bail out Ireland," he said.

Euro zone GDP was down sharply to 0.4 percent in the third quarter, quarter on quarter, from 1 percent in the second quarter. Meanwhile, in the U.S. economists have been raising third quarter GDP from the 2 percent reported, as new data becomes available.

Dolan sees the back up in Treasury yields, and the dollar's strength as a reflection of the improvement in the U.S. economy.

Economic data in the week ahead includes retail sales and inflation data. Retail sales are reported Monday, as is the Empire State survey. Business inventories are also Monday. Inflation data—PPI and CPI—are reported Tuesday and Wednesday, respectively. Industrial production and the National Association of Home Builders Survey are reported Tuesday. The Treasury releases data on international capital flows that day.

On Wednesday, housing starts are released. Weekly jobless claims are Thursday's key headline, along with the Philadelphia Fed survey. Leading economic indicators are also reported that day.

Earnings Central

Earnings are expected from Nordstrom, Lowe's, Gymboree, and InterOil Monday. Wal-Mart, Abercrombie and Fitch, Home Depot and Jacobs Engineering report Tuesday. Wednesday's reports include Target, Applied Materials, Limited Brands and NetApp. Sears, J.M. Smucker, Staples, Gap and Autodesk report Thursday, and H.J. Heinz, Ann Taylor, Kirkland and Mentor Graphics report Friday.

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