Stronger U.S. economic reports and signs the consumer is perking up has economists raising their tepid growth outlooks to slightly less tepid.
Goldman Sachs economists Wednesday were the latest to up their forecast, and they are likely to be followed by others. They were also at the lower end of expectations and now see growth of 2.7 percent in 2011, up from 2 percent. Their 2012 forecast is for 3.6 percent.
Wednesday's stronger-than-expected economic data - both from the U.S. and China - was a catalyst beind the strong rally in stocks and other risk assets. Another driver wasspeculation that the European Central Bank Thursday will announce a plan to buy sovereign bonds in a quantitative easing type operation. That pushed the euro higher.
Thursday is another heavy day for economic news, but the other big focus is the European Central Bank's rates meeting, ahead of the Wall Street open. ECB President Jean Claude Trichet speaks after the meeting.
"That meeting and that press conference is going to hold the key," said Barry Knapp, Barclay's Capital head of U.S. equities portfolio strategy.
Win Thin, senior currency strategist at Brown Brothers Harriman, said the ECB could disappoint, and that could send the euro back on its downward course.
"I'm just skeptical. In this whole crisis, I can't remember when Europe has surprised on the upside. I think they're in denial about how serious this is... You could get some news where they announce some big buying of assets, but at the end of the day does it make them more solvent?" Thin said.
"For now, the markets are focusing on this European stuff, but we still like the dollar higher because we think the U.S. economy's outperforming on a relative basis," he said. The dollar lost 1.2 percent against the euro Wednesday, but it had gained more than 7 percent for the month of November. The euro was at 1.3137.
On the data front, weekly jobless claims are reported at 8:30 a.m. and pending home sales are at 10 a.m. Retailers report monthly sales for November, which includes the important Black Friday and Thanksgiving weekend shopping results.
Thomson Reuters expects the stores in its index to show a 3.7 percent gain for the month of November, with discounters leading with a 4.9 percent gain. Department stores are expect to be up 3.9 percent, and teen retailers are expected to gain 3.3 percent.
The early results from holiday shopping has sparked a higher level of optimism about the consumer. The Goldman Sachs economists, in their note, said the outlook for the U.S. economy in recent weeks has "brightened significantly," and they point to hiring and credit availability, two keys to consumer spending.
They wrote: "Recent data reveal a firmer trend in domestic final demand and suggest that it will be sustained via improvements in net hiring and credit availability. Meanwhile, the downside risk of a material tightening in federal fiscal policy - i.e.. failure to extend expiring tax cuts - has diminished significantly."
Citigroup economists also raised their 2011 forecast this week, to 2.5 percent, from an earlier forecast of 2.2 percent.
Stocks started December with their best gain since September 1. According to Birinyi Associates, the stock market has seen positive results in the first five days of the month in eight of the past 11 months. December is also the best month of the year historically for the S&P 500, and the second best for the Dow.
The Dow Wednesday was up 249 points, or 2.3 percent, to 11,255, and the S&P 500 gained 2.2 percent to 1206. The Nasdaq was up 2 percent at 2549. Yields continued to climb, even as the Fed actively buys Treasurys. The 10-year was yielding 2.94 percent.
Knapp said the U.S. data should continue to improve and an improving U.S. is more likely to overshadow Europe in financial markets. "I think the problem in Europe is going to linger. The U.S. story is getting better," he said. "...The ADP report was encouraging and that comes on the back of the NFIB small business survey earlier this month, showing a decent bounce." ADP's private sector payroll survey showed a gain of 93,000 jobs in November, prompting some economists to raise their expectations for Friday's non farm payrolls.
Knapp said the last time the European debt crisis dominated the news, U.S. companies assured investors there was no impact on their business, and they are likely to see the same this time. "If there's a big hit because of capital markets becoming unglued, that could be a hit. That's still a possibility this time around but we have had a big bounce in business confidence..it's even starting to show up in small business hiring," he said.
Knapp said the consumer is also definitely becoming more of a positive factor,. "I think consumer deleveraging will continue, but it looks like we're past the worst of it and that's why consumer discretionary stocks did so well in the third quarter...The consumer is still at risk but in a much better spot than they were," he said.
The S&P consumer discretionary sector is up 23.4 percent year to date and it has been helped recently as investors bought up retail stocks ahead of holiday sales.
He also sees the service sector, including retailers as a creator of jobs. He pointed to the 2.5 percent growth in service sector consumption in the third quarter, up from 0.1 percent in the first quarter and 1.6 percent in the second quarter.
Other sectors that could benefit from an economic rebound are financials, industrials and energy, Knapp said. The energy sector was Wednesday's best performer, up 2.9 percent. and is up about 11 percent year-to-date. Financials are up 2.3 percent for the year, and industrials are up 18.2 percent.
"What I think will work from here if we do rally on an improving growth outlook without getting disrupted by Europe -- industrials and energy will do well. The materials sector is overowned. Everybody likes the emerging markets trade, but I don't love it," said Knapp.
"The sector that is most leveraged to an improving growth outlook is the financial sector," he said, but added he would view it as just a trade and not a place to commit long term money because of a clouded outlook for the group.
He also likes tech, but notes it's the most correlated to the dollar because of its international exposure. "If the dollar resumed its downtrend, the tech sector would do well. The rolling correlation between the tech sector and the dollar is off the charts," he said. - Follow me on Twitter @pattidomm.
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