Stocks to weigh recession odds

NEW YORK (Reuters) - U.S. stocks face a blitz of economic indicators this week and may come under pressure if any hint the United States is in recession or headed into one.

The housing market, at the center of the economic slowdown, will get particular attention this week. Monday's existing home sales report will be followed by the S&P/Case-Shiller Home Indexes on Tuesday. New home sales are set for release on Wednesday, the same day luxury home builder Toll Brothers Inc (TOL.N) reports quarterly results.

Freddie Mac (FRE.N) is set to release earnings on Thursday. Merrill Lynch cut its stock ratings on Freddie Mac and Fannie Mae (FNM.N) on Friday to "sell" from "neutral," with analyst Kenneth Bruce writing that the market is not braced for the companies to report "significant losses" on their fourth-quarter results. Fannie Mae and Freddie Mac are the two largest sources of financing for U.S. home loans.

"With housing numbers coming out, it's not a good thing in this market, given that they always seem to disappoint," said Owen Fitzpatrick, head of the U.S. Equity Group at Deutsche Bank Private Wealth Management, in New York. "Data just keeps pointing to the economy slowing. I think the market has to adjust expectations about earnings. They're definitely still too high and need to come down."

The median forecast for U.S. existing home sales in January is an annualized rate of 4.80 million units, down from December's 4.89 million units, according to economists polled by Reuters. The report is due on Monday at 10 a.m. EST.

New home sales are seen at an annualized rate of 600,000 units in January, down from December's 604,000, the Reuters poll said. Data is due on Wednesday at 10 a.m. EST.

Other data on tap include several price indexes and growth indicators, which will help determine whether the Federal Reserve will keep cutting interest rates as it seeks to stimulate the economy. Thursday brings an updated report on fourth-quarter gross domestic product.

February wraps up on Friday with an extra day, since this is a leap year. The economic calendar for February 29 is full, with personal income and spending, the Chicago Purchasing Managers Index and the final reading for February on the Reuters/University of Michigan consumer sentiment index.

PPI AND BERNANKE ON THE HILL

A jump in crude oil futures above $101 a barrel and a higher-than-expected reading on January consumer prices last week stirred fears the Fed may be backed into a corner, having to choose between fostering growth or slowing down inflation.

The January reading on the Producer Price Index, set for release on Tuesday, will shed further light on the state of inflation. November and December PPI readings were revised lower on Friday in a recalculation of seasonal adjustments, but unadjusted data showed wholesale prices on a sharp ascending trend, with overall producer prices rising in 2007 year on year by the most since 1981.

Economists polled by Reuters expect that overall PPI rose 0.4 percent for the month of January. They see core PPI, excluding volatile food and energy costs, up 0.2 percent.

Whether the Fed will continue to focus first on stimulating growth may become more clear when Chairman Ben Bernanke gives his semiannual testimony on Capitol Hill. He will appear on Wednesday before the House Financial Services Committee and on Thursday, he goes before the Senate Banking Committee.

Dallas Fed President Richard Fisher said on Friday that policy-makers were faced with a "dilemma" of creating conditions for employment growth without stirring "the embers of inflation."

RETAILERS, AIG AND SUBPRIME NATION

Wall Street will take the pulse of consumer spending with more than a half dozen S&P 500 retailers set to report quarterly results this week.

Upscale department store chain Nordstrom (JWN.N) kicks off the earnings parade on Monday, followed by RadioShack Corp (RSH.N), Target Corp (TGT.N), Macy's Inc (M.N), Home Depot Inc (HD.N) and Office Depot Inc (ODP.N), all on Tuesday.

Clothing chain Gap Inc (GPS.N) reports earnings on Thursday.

American International Group (AIG.N), the world's largest insurer, also is set to release results on Thursday.

AIG is one of the companies eyed by Wall Street for signs of any more mortgage-related losses. Earlier this month, AIG said the size of any write-down from derivative losses was not expected to be material to the company.

In addition to earnings and economic indicators, investors will tune in for any further developments related to the subprime mortgage fallout.

In a sign of the equity market's continued sensitivity to subprime-related news, the Dow and the S&P 500 erased deep losses and rallied late in the session on Friday on a report that bond insurer Ambac Financial Group Inc (ABK.N) could get a bank bailout by Monday or Tuesday. Ambac is facing billions of dollars of expected losses after insuring bonds liked to subprime debt and other risky assets.

Friday's rebound lifted both the Dow and the S&P 500 for the week, but all three indexes remained in negative territory for the year. For the week, the Dow Jones industrial average .DJI rose 0.3 percent and the Standard & Poor's 500 Index .SPX advanced 0.2 percent, but the Nasdaq Composite Index .IXIC fell 0.8 percent.

For the year so far, the Dow is down 6.7 percent, the S&P 500 is off 7.9 percent and the Nasdaq is down 13.2 percent.

"What's going to continue to drive the markets are the anecdotal-like news coming from financial institutions on problems with all these synthetic securities that have been developed by Wall Street," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "We're still in the process of determining the extent of the damages to financial firms."

The spread of the subprime mortgage crisis into other assets will be closely monitored by Wall Street. Relatively obscure auction-rate securities were the latest market to suffer a meltdown as liquidity all but evaporated this week.

"The question is: Have the credit markets stabilized? If they have, equity investors should be feeling better. If the credit markets deteriorate, we may find the recent pullback in the stock market may extend 3 (percent) to 4 percent," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co., in Lake Oswego, Oregon.

"Equity investors are looking over their shoulders at the credit market much more closely than people realize."

(Wall St Week Ahead runs weekly. Questions or comments on this column can be e-mailed to: jennifer.coogan@reuters.com)

(Editing by Jan Paschal)