Oil's drop and dollar's rise key to more gains

Bolstered by falling oil prices and a rising dollar, United States stocks could extend their modest gains next week, even in the face of still troubling consumer- and housing-related data.

Oil's downward trend helped boost consumer spending slightly in the past month, with crude hitting a three-month low below $114 a barrel on Friday.

But its path remains volatile, prompting some investors to remain cautious about the market.

The dollar's recent jump suggests to some that the health of the US economy could improve. The US economy began weakening before others and now that investors are seeing poor economic data from Europe and Asia, some think the United States is closer to a recovery than others.

"For the past two years, crude has followed the dollar almost lock-step," said Marc Pado, US market strategist at Cantor Fitzgerald and Company in San Francisco.

"The strength we have seen in the dollar is almost certainly helping bring crude down. At this point, as you move backward, it actually acts as a stimulus on the economy," he said.

That said, news on the consumer cannot be ignored. Although petrol prices have fallen since July, consumer spending – which accounts for two-thirds of the US economy – continues to falter. Next week, investors will get further data after quarterly earnings from retail giant Target, home improvement retailers Home Depot and Lowe's Companies, and tech bellwether Hewlett-Packard.

This comes after JC Penney, Wal-Mart Stores, Nordstrom, and Macy's posted earnings this week that exceeded analysts' estimates, but issued cautious forecasts for the second half of the year amid concerns on slow consumer spending.

New data on the Producer Price Index, housing starts and manufacturing will also be released next week. But the price of oil and the value of the dollar are more likely to sway investors, analysts said, because the data is based on July's oil and commodity prices, which were markedly higher.

"As for housing starts, I think everyone is expecting them to remain soft. PPI won't be much of a market mover as commodities have been moving lower, which makes last month's numbers irrelevant," said Alan Gayle, senior investment strategist at RidgeWorth Investments in Atlanta.

Thin trading volume indicates that there is still widespread concern about the US economy's health, especially following a $1.5 billion (Dh5.5bn) write-off from JPMorgan Chase.

"I don't think we're out of the woods yet on financials because I don't think we're out of the woods on housing," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale Illinois. Two economic reports on housing are expected next week.

Today, the National Association of Home Builders will release its August Housing Market Index.

Tomorrow, the government releases July housing starts.

Analysts expect the government data to show July housing starts slipped to a seasonally adjusted annual rate of 960,000 units, slightly below June's seasonally adjusted annual pace of 1.066 million units.

THE NUMBERS

$1.5bn: Write-off from JPMorgan Chase has spread concerns about the economy

$114: A barrel rate was oil's three-month low