S&P/CS Composite-20 (YoY) (AUG) (13:00GMT; 09:00EST)
Expected: -4.2%
Previous: -3.9%

Consumer Confidence (OCT) (14:00GMT; 10:00EST)
Expected: 99.0
Previous: 99.8

How Will The Markets React?

The gloomy US economic picture may only get worse on Tuesday, just ahead of the Federal Reserve’s highly anticipated rate decision on Wednesday, as housing and sentiment data are anticipated to disappoint. First, the S&P/Case-Schiller index of home prices in 20 US metropolitan areas is anticipated to fall for negative for the eight consecutive month and by the sharpest amount on record during August, suggesting that the August credit crunch exacerbated weakness in the housing sector. Indeed, with lending standards tighter and supplies of homes rocketing higher amidst extremely limited demand, prices are bound to fall lower. At this point, the housing crash is unavoidable, but the fear is that the slump will lead consumers to pare spending on retail goods and services, sending the broad economy into a recession. The subsequent release of the Conference Board’s consumer confidence index will not help that sentiment, as the index is predicted to fall to an 11-month low of 99.0 from 99.8. The combination of jittery financial markets, oil hitting record highs above $93/bbl, and concerns of an economic slowdown is not likely to sit well with consumers. With sentiment becoming more and more pessimistic, it may only be a matter of time before consumption growth starts to take a hit. The Federal Reserve is well-aware of these issues, and as a result, extremely disappointing data on Tuesday will lead traders to ramp up speculation of a rate cut by the FOMC on Wednesday. Fed fund futures are pricing in a 98 percent chance of a 25bp cut, creating further upside potential for Treasuries, US equities, and additional weakness for the US dollar.

Bonds – 10-Year Treasury Note Futures

Despite a short-term down-trending channel, a steady bid tone carried Treasuries modestly higher on Monday. However, price action may be minimal ahead of Wednesday’s big US event risk, as the FOMC is anticipated to cut rates by 25bp. Nevertheless, Tuesday’s US data could continue to drive Treasuries higher, especially if it drops in line with or more than expectations since it will only underpin the case for a reduction in the Fed funds rate. As a result, the contract is likely to work up to near-term resistance at 110-27 and 111-01.

FX – EUR/USD

Market-wide weakness in the greenback has allowed EUR/USD to continue its ascent towards 1.4500, and though resistance at 1.4435 has helped to quell gains today, that level may not hold for long. On Tuesday, US home price and consumer confidence data are both anticipated to reflect gloomy results. With the woes of the housing sector worsening and consumer sentiment becoming more pessimistic amidst record high oil prices and financial market jitters, fears are looming that a contraction in consumption growth will exacerbate recession risks. As a result, if the S&P/Case-Schiller home price index and the Conference Board’s consumer confidence index both drop in line with or more than expectations, the greenback could fall back further against the Euro to take the pair towards 1.4450, especially since the news will increase the chances that the FOMC will cut rates by 25bp on Wednesday. On the other hand, resilient consumer confidence could allay spending concerns to another day, and allow EUR/USD to consolidate its gains near the 1.4400 level.

Equities – Dow Jones Industrial Average

The Dow made headway towards higher on Monday, though resistance at 13,896 capped gains ahead of the FOMC’s expected rate cut on Wednesday. Fed fund futures are pricing in a 25bp cut, but there is some speculation that the central bank will slash rates by 50bp or do the completely unexpected: leave rates unchanged. With the odds working in favor of looser monetary policy, mild gains are likely for the Dow ahead of the big decision. However, Tuesday’s event risk could weigh the equity index down as the data is anticipated to show that home prices fell for the eight consecutive month while consumer confidence continued to erode, increasing the likelihood of a slowdown in household spending growth. If the US news proves to be much worse than expected, the Dow could pull back slightly. However, the Dow is likely to shake off the news to target the 14,000 level.

Terri Belkas is a Currency Strategist at FXCM.