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With US Data Improving, Markets May Ignore Europe

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The improving trend in U.S. data could again be a factor for markets Wednesday, if negative sentiment about Europe can be held at bay.

Stocks closed higher Tuesday, after a better-than-expected showing in October retail sales data, and the Empire Manufacturing survey turned slightly positive, up 0.61, after five negative months. Retail sales rose 0.5 percent, above the expected 0.3 percent.

The markets were also calmed by word that Italy's incoming Prime Minister Mario Monti would soon name a cabinet, moving the country down the road to new leadership and economic reforms. This was a positive even as the yields on French, Spanish and Italian bonds continued to rise.

Investors will be watching the U.S. consumer price index at 8:30 a.m. EST, expected to be unchanged after the 0.3 percent drop in producer prices Tuesday. There is also industrial production and capacity utilization data at 9 am. and the National Association of Home Builders index at 10 a.m. Treasury reports TIC data on international capital flows at 9 a.m.

"This is a week where we seem to have, at least in the short run, moved concerns about Europe to the back burner. That doesn't mean the lid can't come off the pot, but this is the first time in a long time that we care about economic data," said Art Hogan of Lazard Capital Markets.

Dell , which fell more than 3 percent after the bell, could also be a factor in Wednesday's trading. The computer company's net rose but revenues were flat. Dell earned $893 million, compared to $822 million last year. Its revenues were $15.4 billion, less than the $16.2 billion expected. Before the bell earnings are expected from Abercrombie and Fitch, Target and Tyco. Applied Materials, Youku.com, NetApp and LimitedBrands report after the close.

The Dow was up 17 at 12,096, losing much of its gains just before the closing bell Tuesday. The Nasdaq however, rose 1 percent to 2686, and the S&P 500 gained 6 points to 1257. Stock market volume was again very light.

Tech was the best performing S&P sector, rising 1.3 percent Tuesday. Pete McCorry, who trades bank stocks at KBW, said there's been a change in the type of buyers in the bank group, which rose about 0.4 percent Tuesday. He said the stocks have risen as shorts were squeezed, but now the buyers are big institutions who had stayed out of the sector. "Now what you have is a change from the underweighting," said McCorry, adding some buyers are still not giving full weighting to the group.

The euro Tuesday fell to 1.3532, and U.S. Treasury prices fell as stocks rose. The 10-year yield rose to 2.059 percent.

"We might get a short-term respite when Mario Monti announces the formation of his government and who is going to be in it," said Brian Dolan of Forex.com. "He's meeting with the Italian president tomorrow. That could lead to further calming of the markets."

Dolan, however, said the calm will not last as long as Europe remains an issue, and it is likely to be a problem until the European Central Bank steps up to take action. ECB officials have repeatedly said they are not the lender of last resort for Europe, and the ECB's new President Mario Draghi said the central bank does not expect the purchases of sovereign debt to be a long term solution.

But Dolan said there is no other solution but for the ECB to step up. The European Financial Stability Facility bailout fund is not big enough to backstop countries like Italy and France, which is also surrounded by a negative speculative fervor.

Econorama

The improved U.S. data led a number of economists to raise their outlook for the fourth quarter Tuesday. Ethan Harris of Bank of America Merrill Lynch raised his forecast to growth of 3.3 percent from 3.0 percent, and Morgan Stanley economists now expect 3.5 percent growth.

Deutsche Bank chief U.S. economist Joseph LaVorgna is not raising his 3 percent forecast yet, but he says there is a case to be made where fourth quarter growth could be as much as 4 percent.

He is watching the industrial production number closely and expects to see a 0.5 percent gain for October. "If these industrial production metrics turn out to be decent, if not slightly better than consensus, that will give you some really good evidence that domestic production is rising to meet better demand, and you're going to have to better growth in the fourth quarter," he said.

What Else to Watch

Richmond Federal Reserve President Jeffrey Lacker speaks in Washington at 11:15 a.m. EST. His topic is Fed policy and the allocation of credit. Boston Federal Reserve President Eric Rosengren speak sat 12:45 p.m. at the Boston Economic Club.

Follow Patti Domm on Twitter: @pattidomm

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