updated 12/2/2007 7:56:48 PM ET 2007-12-03T00:56:48

Wall Street’s newfound confidence that interest rates are headed lower may not be enough to fuel a December rally if the economy looks like it’s weakening.

Major Market Indices

This week’s reports on the job market and retail sales, along with readings on the manufacturing and service sectors, will be key in determining how well the economy is weathering a housing market that most experts predict will keep deteriorating well into the new year.

The stock market heads into the final lap of 2007 having posted a 3.01 percent rise in the Dow Jones industrial average last week, a 2.81 percent gain in the Standard & Poor’s 500 index, and a 2.48 percent advance in the Nasdaq composite index.

It was the best weekly point gain for the Dow — the blue chips rose nearly 391 — in more than four years. The advance was driven by hints of an upcoming rate cut from Federal Reserve officials and news that Citigroup Inc., Freddie Mac and E-Trade Financial Corp. were able to raise cash to offset some of their debt.

But the positive week nonetheless capped off the blue-chip index’s most negative month in five years. Financial companies still face billions of dollars in writedowns in the fourth quarter. And though oil prices have retreated from record highs, the dollar remains weak against rivals including the euro, the pound and the Canadian dollar — a trend some argue shows that rates should stay put.

Moreover, even if the Fed does loosen its policy at its Dec. 11 meeting, rate cuts can only go so far in boosting a flagging economy. Last week, Goldman Sachs upped the chances of a recession to between 40 percent and 45 percent, while current and former government officials offered some of the year’s most dreary economic outlooks.

Fed Chairman Ben Bernanke said in a speech last Thursday at the Charlotte Chamber of Commerce fourth-quarter gross domestic product is slowing “significantly” in the fourth quarter, despite having grown 4.9 percent in the third quarter.

A day earlier, Fed Vice Chairman Donald Kohn said housing is deteriorating at a “very, very rapid” rate, and that “I don’t think we have seen the bottom.”

And former Treasury Secretary Lawrence Summers, in a somber speech Thursday to bankers at an American Banker/SourceMedia event, said it would be unprecedented, considering the size of the headwinds the economy faces, for expansion to continue.

“It is quite clear that the substantial majority of foreclosures that will take place in this wave have not yet taken place,” he said.

Though current Treasury Secretary Henry Paulson has been meeting with mortgage industry officials and regulators about possibly keeping low introductory loan rates from resetting at much higher levels, signs point to a very shaky economy in 2008.

For stocks to rally this month, investors will want evidence that consumers are still spending.

Major retailers, including Wal-Mart Stores Inc. and Target Corp., release November sales figures Thursday, which should shine more light on how strong holiday shopping will be this year.

Data so far have suggested respectable post-Thanksgiving sales, but investors are concerned that shoppers will be hesitant due to still-lofty gas prices and sinking home prices. Wall Street’s also worried that sales have been decent so far only because prices have been sharply discounted, which is good for consumers but bad for companies’ profits.

Consumer spending relies heavily on employment, so Wall Street will also be closely eyeing, as always, the Labor Department’s monthly report on the job market. On Friday, economists surveyed by Thomson/IFR expect the report to show November payrolls rose solidly, but by a smaller amount than in October, and that the unemployment rate ticked up to 4.8 percent from 4.7 percent.

Also this week, the Institute for Supply Management releases its indexes on manufacturing and service sector activity. Economists anticipate that growth in both areas in November was slower than in October.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 2.78%
$30K home equity loan FICO 5.78%
$75K home equity loan FICO 4.54%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.57%
13.57%
Cash Back Cards 17.91%
17.91%
Rewards Cards 17.15%
17.15%
Source: Bankrate.com