Oil's fall, dollar's rise key to gains

Clerks relay trades in the Euro Dollar pit at the Chicago Mercantile Exchange in a file photo.

NEW YORK (Reuters) - Bolstered by falling oil prices and a rising dollar, stocks could extend their modest gains this 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 U.S. economy's health could improve. The U.S. 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, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "The strength we've 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."

That said, news about the consumer cannot be ignored. Although gas prices have fallen since July, consumer spending -- which drives two-thirds of the U.S. economy -- continues to falter.

This week, investors will get further data after quarterly earnings from retail giant Target Corp (TGT.N), home improvement retailers Home Depot Inc (HD.N) and Lowe's Companies Inc (LOW.N), and tech bellwether Hewlett-Packard (HPQ.N).

This comes after J.C. Penney Co Inc (JCP.N), Wal-Mart Stores Inc (WMT.N), Nordstrom Inc (JWN.N), and Macy's Inc (M.N) 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.

HOUSING STARTS LOOK 'UGLY'

New data on the Producer Price Index, housing starts and manufacturing will also be released this 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.

Investors are also still wary of the rally in financial stocks in the past week, as analysts emphasize that the fallout from the credit crisis is far from over.

Thin trading volume indicates that there is still widespread concern about the U.S. economy's health, especially following a $1.5 billion write-off from JPMorgan Chase & Co

(JPM.N).

"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 this week. On Monday, the National Association of Home Builders will release its August Housing Market Index. On Tuesday, 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.

"Housing starts will likely be ugly, but that's expected," said Keith Hembre, chief economist at First American Funds in Minneapolis.

Data from the Federal Reserve Bank of Philadelphia on Thursday could be an important indicator of consumer spending in the year's second half, Pado said. He expects the Philadelphia Fed, which issues numbers on manufacturing in the region, to report an uptick in new orders.

"When we have new orders, that's going to tell you: 'Are people ready to put stuff on the shelf? Are they inspired by the falling oil prices?'" Pado said. "It's important because one of the big drags on the GDP in the second quarter was inventory."

ALL ABOUT OIL

But the focus this week will be on oil and the dollar.

Oil prices fell below $114 a barrel on Friday, down from $115.20 a week ago on growing concerns about demand in industrial nations and the stronger dollar.

Equally important, crude has fallen sharply since reaching an all-time high of $147.27 a barrel on July 11 as growing global economic problems and high fuel prices have cut demand in the United States and Europe.

On Friday, the front-month U.S. crude oil futures contract fell $1.24 to settle at $113.77 a barrel -- down 23 percent from July's record on the New York Mercantile Exchange.

But investors are keeping a wary eye on the continued fighting between Russia and Georgia. Russian armed forces have occupied parts of Georgia since repelling a Georgian attack last week on the tiny pro-Russian separatist territory of South Ossetia, which in the 1990s threw off control of Tbilisi, the capital of Georgia.

"Any geopolitical developments, whether it be the Iranian situation or further developments with Russia and Georgia, those will influence oil markets," Hembre said.

(Additional reporting by Jennifer Ablan and Kristina Cooke; Editing by Jan Paschal)