Economic news -- including a Federal Open Market Committee meeting -- and a dash of corporate earnings will fill the coming week's bill of fare. But fear of further terrorism could easily trump any financial event. U.S. markets bounced back Friday after plunging on reports that al Qaeda might have had a hand in the bombings that killed 198 people in Madrid. The rally couldn't salvage the week, however, as the Dow ended down 336 points, or 3.4%, over the five sessions, while the Nasdaq lost 3.1%. Investigators are still trying to determine who placed the bombs. But Thursday afternoon's plunge illustrates how exposed financial markets remain to exogenous shock. "I think that it's a wake-up call to people that this is not over," said Bill Rhodes, chief investment strategist at Rhodes Analytics. "It is a knock on the door of the Europeans." Rhodes thinks memories of the attack could hang over the market next week. "Markets sell off on bad military news and tend to rally on good political news," said Rhodes. "What happened
Thursday is a bad military event. This is a war. This is a full-fledged war." Peter Cardillo, chief market analyst at S.W. Bach & Co., also doubted the market could overcome its jitters. "I suspect that with the market being high, it could run into pressure every time there is talk or threats of terrorism." If the terror threat isn't enough to worry investors, next week's meeting of the Federal Open Market Committee should be. Cardillo expects that interest rates will remain the same, but said the Fed's language "will indicate that, if need be, they will raise rates." Jeff Kleintop, chief investment strategist at PNC Financial Services Group, noted the important relationship the Fed has with the jobs data. He said that because the Fed has upgraded its assessment of the labor market in its last three statements, investors will be eager to hear what it says next week.
"I don't think anyone out there is closer to the all the available labor market data than the FOMC," he said. "If the statement contains language suggesting that the jobs data caused the FOMC to reassess their view of the labor market, it would be fair to conclude that the jobs drought is more serious and certainly has delayed any Fed action." Rhodes agreed, saying investors will spend a lot of time parsing what the Fed says on Tuesday. "People will be reading the tea leaves out of these things," he said, meaning that any variations in previous wording will be scrutinized. "Even the slightest change could have an affect on the equity or fixed-income markets," said Rhodes. Meanwhile, Monday's release of February industrial production and capacity utilization and Wednesday's release of the consumer price index for February will be also on investors' radar screens, Cardillo said. Industrial production is forecast to rise 0.4% on top of the prior month's 0.8% increase, while utilization is expected to be at a rate of 76.4%, compared with 76.2% last month. The CPI is forecast to rise 0.3% from the prior month. "I would think that as we go forward from those levels of CPI that we're going to start seeing first modestly stronger CPI and then some pretty strong CPI numbers," said Rhodes, adding that "we're not anywhere near that point now." Tuesday has housing starts and building permits for February. Housing starts are seen increasing to 1.93 million, from 1.903 million last month, while building permits are expected to drop slightly to 1.903 million from the previous month's 1.92 million. Earnings reports from homebuilders KB Home ( KBH) and Lennar ( LEN) will also be released Tuesday. "The homebuilders will catch the eye of investors because they want to get some clues if there is definitely weakness in the housing market," said Cardillo.
In other economic news, leading indicators for February will be released on Thursday with economists forecasting a flat month, compared with 0.5% increase in January. Also on Thursday, the Philadelphia Fed index will be out; analysts expect a reading of 29.5, from 31.4 in February. "The bottom line is going to be as long as there isn't anything out that is really weak, that will drive the market lower. Most data looks benign," Rhodes concluded. Lastly, Friday is a "triple witching" day, noted Rhodes, which could be cause for volatility in the markets. Equity options, index options and stock index futures will all expire that day. Other earnings reports in the coming week include ImClone Systems ( IMCL) and Tenet Healthcare ( THC) on Monday; General Mills ( GIS) and Lehman Brothers ( LEH) on Tuesday; Bear Stearns ( BSC), Jabil Circuit ( JBL) and FedEx ( FDX) on Wednesday; and Adobe Systems ( ADBE), Kmart Holding ( KMRT) and Williams-Sonoma ( WSM) on Thursday.