Geopolitical events may eclipse U.S. economic news, even with this week's inflation reports and Fed meeting.

Traders went home Friday, concerned by the tragedy and destruction from Japan's massive earth quake and tsunami. They are also worried about the potential for more unrest in the Middle East, and have lingering concerns about Europe's sovereign debt problems, even after EU leaders agreed to the main points in a stability package Friday.

The Fed holds a one day meeting Tuesday, and while it is not expected to take action, the meeting will refocus traders on the Fed's extraordinary easing program, set to end in June. Producer prices and consumer inflation data are also expected Wednesday and Thursday.

The stock market is also likely to track the direction of oil, which weakened at the end of the week as protests in Saudi Arabia proved to be muted. The devastation in Japan added to the decline, as it took a large amount of refining capacity off line, reducing the amount of crude needed by that country, a major crude importer.

Stocks fell in volatile trading during the past week, with the Nasdaq leading the decline. It was off 2.5 percent to 2715, its worse week since August 13. The Dow was down 1 percent or 125 points to 12,044, and the S&P 500 fell 1.3 percent to 1304.

Oil, which has had a strangle hold on stocks, fell 3.1 percent for the week to $101.16. Oil also sold off in a selling spree that took stocks and commodities lower around the globe after a surprise trade deficit for China and a downgrade for Spain reignited fears of a global slowdown. Even gold, viewed as a safety play, was lower on the week, losing a half percent to $1421.50. Corn lost nearly 9 percent, soybeans were down almost 6 percent and wheat was down 13.6 percent.

Stocks Friday, however, gained, with the S&P up 9, even as stock markets in Europe and Asia closed lower on concerns about Japan.

"I think if we correct much more than we have, then the (stock) market is sending you a message that there's a bigger growth problem that it appears. I don't believe we should see more than a five percent correction," said Barry Knapp, head of equities portfolio strategy at Barclays Capital.

"There's outside issues to worry about at the same time you have strong underlying data which should be the determinant," he said.

J.P. Morgan strategist Thomas Lee said he expects a correction this spring, and it may be underway now or even in several weeks from now. "I think we're going to end up at 1250 (on the S&P) before the market gains traction," he said

Lee said the decline in oil would be a positive if it continues. "It's trending away. It's very encouraging. I'm glad oil just doesn't go to the sky. What would seriously threaten a bullish case is $120 crude and what completely destroys it is $140," he said. "I do think oil has been up long enough that it's done some damage to earnings, not the S&P overall, but some industries are going to take a hit from this."

"I think next week is going to take its cues from geopolitical events rather than the domestic economy. I think we're getting somewhat desensitized to Libya, which is good as long as it (unrest) is not spreading," he said.

Oil Drill

The rise in oil and the impact of higher gasoline prices on consumers has been a nagging concern for economists. Gasoline prices were clearly a factor helping drive Friday's report on consumer sentiment to its lowest level in five months.

"I'm not too worried about it, but at this point ,you can't breathe easy," said Stephen Stanley, chief economist at Pierpont Securities. "(Oil) was running at $85 or $90 before it all started. It could certainly go lower from here. If it held on at $100, I think people would argue that it's not something that's going to hit the economy."

Oil crossed above $107 in the past week, as it appeared protests might break out in Saudi Arabia as activists called for massive protests Friday, in a "day of rage." Those large scale protests did not materialize in the Gulf country, which is the world's largest oil producer.

Andrew Lipow, president of Lipow Oil Associates said another factor in oil's decline is that Japan may need less crude supply temporarily. He said Japan, a major importer of Middle Eastern crude, has lost about 18 percent of its refining capacity temporarily.

Lipow has said he does not see a supply issue with oil, and he does not expect gasoline prices in the U.S. to rise much above a national average of $3.70 per gallon. Gasoline in some areas, particularly California, is already above $4 a gallon.

Stanley does not expect the U.S. economy to feel the impact of the tragic Japanese earth quake and tsunami. "By the time we come in on Monday this thing is going to be well defined and not likely to have a huge impact..unless there's some new twist to this we haven't seen," he said.

The Japanese disaster did drive yen higher, as traders moved ahead of an expected repatriation by Tokyo of funds to pay for repairing the damage. Traders were watching developments there late Friday, as Japan declared states of emergency at five nuclear reactors at two power plants. Thousands of nearby residents were evacuated while workers tried to get the reactors under control.

As far as Europe goes, traders will be assessing comments from the EU leaders meeting ahead of Monday trading. The leaders agreed to improve competitiveness and to stricter rules on deficits.

However, the markets may not think the actions went far enough because economic goals will be set by individual companies. "They're leaving it up to each country's discretion on how they want to do it. It's kind of like saying 'be a good boy and we'll talk about it in a year.' I don't think the markets are going to be particularly satisfied by that. It's got to be digested over the weekend," said Brian Dolan of Forex.com.

Fed Ahead

The Fed is not expected to make any changes to its policy statement at its Tuesday meeting though it may change its economic outlook.

"The Fed's not going to do anything that's going to rock the market. There might be talk at the meeting about the 'extended period' language but they're not going to put that in the statement," said David Ader, chief Treasury strategist at CRT Capital.

The Fed has said it would keep rates low for an "extended period," and markets expect that language to be tweaked about six months ahead of any rate move, now seen sometime next year.

Traders are beginning to focus more on the Fed's unwind from its "quantitative easing" program, known in the market as "QE2." The Fed has said the program would end in June.

"I think the Fed is going to be pretty quiet. It's the calm before the storm. I think this March meeting is going to be the last one where there's not much talk about it and then after that they've got to start prepping the markets for the end of "QE2" or whatever they're going to do," said Stanley.

Econorama

Besides the Fed, markets are watching inflation data with producer price index (PPI) Wednesday and consumer price index (CPI) Thursday.

"To me, the big number will be the CPI, having had a 0.2% core last month. Clearly that was a shot across the bow to the Fed's feeling inflation is going to stay low for quite a while," Stanley said. He expects core at 0.1%, and headline inflation, which includes energy and food, to be 0.5%.

"You can guarantee that March is going to be pretty high on the headline after the rise in gasoline," he said.

Other data includes the Empire State survey and Treasury international capital flow data Tuesday. Housing starts and the current account deficit are reported Wednesday, and industrial production, the Philadelphia Fed survey, leading indicators and weekly jobless claims are reported Thursday.

Major earnings reports next week include FedEx and Nike , due Thursday before and after the bell, respectively.