US Housing Starts (OCT) (13:30 GMT; 08:30 EST)
Expected: 1170K
Previous: 1191K

How Will The Markets React?

With the Thanksgiving holiday in the US on Thursday, price action in the markets could prove to be subdued as US traders leave their desks for the week. On Tuesday, US housing starts for the month of October are anticipated to decline further. The index already sits at the lowest point since March 1993, and it is likely to get worse amidst continuing problems in the mortgage market, massive inventories of unsold units, and the increasingly negative sentiment amongst potential buyers and home builders. Indeed, after the Federal Reserve cut rates by 25bp on October 31 to 4.50 percent, the policy statement noted that “the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.” With no end in sight for the deterioration of the housing market and the risks of a recession rising, the news may only exacerbate the dour sentiment on the US economy ahead of the release of the minutes of the October FOMC meeting. In a recently announced effort to improve transparency in communications, the minutes will be the first to contain expanded forecasts for growth and inflation. After Fed Chairman Ben Bernanke told a congressional hearing on November 8th that policy makers expected growth to "slow noticeably" in the current quarter and remain "sluggish" in the first half of 2008, the GDP forecasts could prove to be very disappointing. Nevertheless, various FOMC voting members have made comments suggesting that they do not intend to cut rates in December, especially as inflation pressures building rapidly. If the CPI forecasts are ramped up significantly, the markets may finally start to pay heed and stop speculating that Bernanke & Co. will decrease the federal funds rate by 25bp at their next meeting.

Bonds – 10-Year Treasury Note Futures

Although Treasuries ended last week at their highest close of the year on both daily and weekly charts and the trend remains very much to the upside, the candlesticks on both of those charts – a hanging man – are actually bearish. Event risk on Tuesday out of the US could prove to be extremely market moving, as the minutes from the October FOMC meeting will be released along with revised forecasts for the Q4 and for 2008. The report will likely show downgraded GDP outlooks, but a jump in expectations for CPI or overly hawkish commentary in the meeting minutes may finally lead traders to stop expecting a December rate cut and lead Treasuries lower.

FX – EUR/USD

The Euro continues to consolidate its gains against the greenback, and the daily and intraday charts suggest that EUR/USD could break out shortly. Whether the move will be to the upside or downside is questionable, as symmetrical triangles can find price action going either way. Regardless, Tuesday’s US event risk could finally provide a steady bid tone for the US dollar and the FOMC minutes from October – which will include revised forecasts for Q4 and 2008 – may lead the markets to stop betting on a December rate cut. Traders should look for hawkish commentary within the report or upgraded CPI estimates, as well as downgraded GDP outlooks. If the minutes show that the FOMC’s main concern going forward is indeed the upside risks to price stability, EUR/USD could pull back towards 1.46, with a break below that level likely to target 1.4520. On the other hand, if Bernanke & Co. appear to be more worried about the potential for a recession, EUR/USD may rally to fresh highs above 1.4750.

Equities – Dow Jones Industrial Average

The Dow’s bounce from the 13,000 may prove to be short lived, as he index pulled back from resistance at 13,350 last week to fall back below the 200 SMA at 13,232. With inflation pressures in the US confirmed to be growing rapidly, there is little chance that the Federal Reserve will cut rates in December. Looking ahead to next week, the Dow may remain contained to a range of 12,975 – 13,350 as the Thanksgiving holiday in the US on Thursday may result in light trading throughout the week. Nevertheless, traders should watch event risk from the release of the minutes of the October FOMC meeting, which will include revised forecasts for growth and inflation. The news is likely to be negative for the equity markets, as upwardly revised CPI outlooks or simply hawkish commentary may finally lead the markets to believe that the FOMC will not cut rates by 25bp at their December meeting, with a break of 12,975/13,000 targeting the August lows at 12,517.94.

Terri Belkas is a Currency Strategist at FXCM.