Tax-Cut Debate, G20 Key to Coming Week

The coming week is likely to be a relatively quiet one for the markets, with few economic and earnings numbers.

Author:: Shanthi Bharatwaj
Publish date:: Nov 6, 2010 10:38 AM EDT

NEW YORK (

) -- The coming week is likely to be a relatively quiet one for the markets, with few economic and earnings numbers on tap. The Group of 20 summit meeting toward the end of the week likely will be significant for the dollar and could have a cascading effect on stocks and commodities.

After an intense week of market-moving news, investors may welcome a calm stretch to reflect on the latest game-changing developments in politics and the economy.

Stocks rose to two-year highs last week after Republicans gained control of the House of Representatives in the midterm elections and the

Federal Reserve

said it would buy $600 billion worth of Treasuries (dubbed "QE2" to refer to the second round of quantitative easing by the Fed) to boost the economy.

On Friday, the Labor Department announced that the

economy added 151,000 jobs, which was more than expectations for 60,000. However, the unemployment rate remained stubbornly at 9.6%. Several other earnings and economic reports came in above expectations, although almost all of the attention was on the elections and the Fed.

The wave of positive news drove up the

Dow Jones Industrial Average

2.9% during the week to close at 11,444 -- a level not seen since the week just before the Lehman Brothers collapse.

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"The markets are at the highs of the year. Investors will now have to evaluate whether the economy and earnings can grow fast enough to test those highs further," said John Canally, economist at LPL Financial.

The jobs numbers will still take precedence over others, given the Fed's concerns about the high unemployment rate. The central bank will want to see jobs rise by 200,000 to 300,000 a month on a consistent basis before it considers scaling back its efforts, according to analysts.

Economists will also be paying attention to weekly commercial and lending data to see whether there is any pickup in lending following the latest quantitative easing. But it will be a few months before the effects of the easing show up in the numbers, according to Canally.

In the meantime, the bond market may serve as a good indicator of inflation expectations, according to Andrew Neale of Fogel Neale Partners. Neale expects inflation to climb, with food and other commodity prices rising to new highs. "Tell any business person that there is no inflation and they will laugh," says Neale. Fears of inflation are driving investors to gold and other commodities and against the dollar.

Investors will also be turning their attention to the lame-duck Congress in hopes of a decisive move to resolve uncertainty on taxes and health care.

In the first sign that the White House is moving toward the center following the midterm elections, President Obama expressed a willingness to discuss the extension of the Bush-era tax cuts. The president on Thursday invited Republican and Democratic leaders to join him in a meeting Nov. 18 to discuss what to do in the waning days of the current Congress.

Extended unemployment insurance benefits, which are set to expire Nov. 30, may also be discusssed. If allowed to expire, holiday spending could take a hit.

Health care stocks will also be on everyone's radar on expectations that Republicans will work to defund the health care act. Banks could also light up if they get the green light to raise dividends. Banks are expected to be informed as soon as next week by the Federal Reserve of specific guidelines needed in order to raise their dividends, according to

The Wall Street Journal

The Fed's quantitative easing move has drawn criticism from emerging-market countries, which are witnessing a rise in their local currencies amid higher fund flows. Meanwhile, the U.S. may once again step up pressure on China to revalue the yuan.

In other economic news, wholesale inventories data will be released on Tuesday. Inventories are expected to rise by 0.6% after increasing 0.8% in the previous month.

The jobless claims data will be released a day early on Wednesday, because Thursday is Veterans Day, a government holiday. (The stock market will be open Thursday.) Initial claims are expected to drop to 450,000 from

457,000 last week.

On Friday, the University of Michigan will release its preliminary Consumer Sentiment Index for November. The index is expected to climb to 69 from 67.7 in the previous month.

Earnings season is starting to wind down. A clutch of retailers, including

Macy's

(M) - Get Report

Kohl's

(KSS) - Get Report

and

JCPenney

(JCP) - Get Report

will report earnings in the coming week. Investors will be watching for guidance on the holiday season.

Solar companies

LDK Solar

(LDK)