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There's Retail Sales, Retailers' Earnings & Fed speak but Europe Could Keep Markets In Check

Europe could keep markets on a short leash Tuesday.

Despite new governments in Italy and Greece, investor enthusiasm for risk assets waned Monday and yields on peripheral European debt again went wider against the benchmark German bund. On Tuesday investors will consider some important U.S. data reports, such as retail sales and PPI, but European GDP hits the tape ahead of the U.S. trading day and it is expected to be just barely positive.

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Wal-Mart and Home Depot report earnings ahead of the opening bell, as do Staples , TJX and Beazer Homes .

Retail sales, released at 8:30 a.m. EST, are expected to be up 0.3 percent for October, but up just 0.2 percent when cars are excluded. Retail sales rose a better-than-expected 1.1 percent in September, its best pace in seven months.

"We think that the retail sales will be on the softer side this month," said Dean Maki, chief U.S. economist at Barclays Capital. "We're looking for a 0.1 headline and a flat reading outside of autos. The core we expect would be up 0.2 percent, which excludes autos and gasoline... It would still be consistent with 2.5 percent growth in consumer spending in the fourth quarter."

PPI is also expected at 8:30 a.m., as is the Empire State survey, expected to show some improvement. PPI is forecast at a consensus -0.1 percent. Business inventories are reported at 10 a.m.

There are also a number of Fed officials speaking Tuesday, including Chicago Fed President Charles Evans, who will be on CNBC at 11 a.m. for an hour. Evans, a dove, was the lone dissenter at the last Fed meeting. He also speaks at the Council on Foreign Relations earlier in the morning.

The Dow fell 74 points to 12,078 on Monday and the S&P 500 was down 12 points at 1251, on what was the slowest trading day since May 27.

Boris Schlossberg of GFT Forex said the European officials were to blame for the decline in the euro, which finished the New York session at 1.3634. He said the market is suspect of the European Financial Stability Facility bailout fund and how it will be funded and used. "We got exactly the opposite of what the market needed. (European Central Bank) ECB officials were sending exactly opposite the message the markets wanted hear," he said.

The ECB last week trimmed its purchases of European bonds to 4.48 billion euros from 9.52 billion the week earlier. Bundesbank President Jens Weidmann reiterated comments made by others, that the ECB should not become the lender of last resort for the Italian government and that the ECB needs to protect its credibility.

"They need to use their balance sheet. It's time for the bazooka. They are using a pea shooter," Schlossberg said.

The euro and risk assets, in general, were stronger Friday as Greece and Italy moved to replace their prime ministers with well-regarded technocrats, who are expected to temporarily lead the countries' efforts to make financial reforms.

Santa Rally?

Despite the still unresolved European debt saga, Jeffrey Kleintop, chief market strategist at LPL Financial, said the stock market is following a text book that it's followed before. He said the old adages, "sell in May and go away" and October as "bear killer" have worked so far this year, so it may be time to plan for a Santa rally.

First the markets need to get through the congressional vote at the end of the week to keep the government funded. Then, there's the deadline next week for the Congressional "super committee," which was tasked to find $1.5 trillion in deficit reductions over ten years. If the committee does not find the reductions, automatic cuts of $1.2 trillion kick in, starting in 2013.

"There's a couple of things that could cancel Christmas. Certainly, what's going on in Europe could do it," said Kleintop. He said he does not believe the Congressional super committee is one of them because the automatic spending cuts will be there.

"It would be disappointing, but it wouldn't change the credit rating. It just kicks the problem out to 2013," he said.

He also expects to see some positive signs out of Europe in the next few weeks as the new governments take hold in Greece and Italy.

But if the late year rally materializes, the next chapter in the text book may not be so positive. "Next year, being an election year, the first, second and third quarter see a lot of volatility but are rather flat," he said. The fourth quarter is where the market really makes its move, up or down, depending on whether it likes what it sees in the election results.

Record Low Yields

Corporations continued their dash to issue debt, at record low yields Monday. San Diego Electric and Gas became the first U.S. company ever to price a 30-year bond with a yield under 4 percent, according to Thomson Reuters IFR. San Diego, one of nearly a dozen companies tapping the corporate debt market Monday, issued $250 million 30-year bonds, to yield 3.958 percent.

Companies continued to rush the short window that remains for 2011 issuance, despite soggy conditions in the equity market. Issuers are trying to get on the calendar ahead of Thanksgiving, as there is just a two-week period left after the holiday for issuance activity.

Oil Drill

The oil complex gave up ground Monday, as crude declined 0.9 percent to $98.14 a barrel, and gasoline lost 2.6 percent to $2.5353 per gallon. Natural gas was also down 3.5 percent to $3.458 per million BTUs.

"Natural gas certainly just continues to deteriorate. The shale supply story is having a huge impact here in this market. To think, we're at such low levels coming into the heating season," said John Kilduff, analyst with Again Capital.

Kilduff said there was some interesting action in oil Monday. "We're looking to go back into "contango," where the front month is pressured compared to the back (contract months). We were in backwardation which was a bullish signal and now we're going back to contango, which is a bearish signal," he said.

Heating oil lost just 0.3 percent to $3.1622 per gallon. "The other incredible story is the premium heating oil has to gasoline. It's $0.65 a gallon. From a fundamental basis, we've seen a real drawdown in heating oil inventory in the last several weeks. Refineries are operating at very low rates, and there's good demand coming out of China. We're seeing good diesel demand and weak gasoline demand," he said, adding that diesel demand is high right now as trucks make pre-holiday deliveries.

After the bell, Anadarko announced that its Wattenberg oil field in Colorado may hold more than a billion barrels equivalent of recoverable oil and natural gas. Its stock rose more than 3 percent after the announcement. Anadarko said its president Al Walker will be presenting at 9 a.m. at the Bank of America Merrill Lynch energy conference.

"The discoveries just keep coming, and the Libyans are going to be (producing) upwards of 800,000 barrels by December," said Kilduff.

What Else to Watch

0800 a.m. Chicago Fed President Charles Evans speaks in New York on Fed's dual mandate

0830 a.m. St. Louis Fed President James Bullard speaks in St. Louis on economic outlook and monetary policy

0930 a.m. San Francisco Fed President John Williams speaks in Scottsdale, Ariz. on the outlook

1230 p.m. Dallas Fed President Richard Fisher speaks in New York on "too big to fail"

0100 p.m. Minneapolis Fed President Narayana Kocherlakota speaks at an economic outlook seminar in Sioux Falls, S.D.

Follow Patti Domm on Twitter: @pattidomm

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