US New Home Sales (DEC) (15:00 GMT; 10:00 EST)
Expected: 645K
Previous: 647K

US New Home Sales (MoM) (DEC) (15:00 GMT; 10:00 EST)
Expected: -0.3%
Previous: -0.9%

What Are The Markets Facing?

On Monday, the Commerce Department is expected to report that new home sales fell another 0.3 percent to a 12-year low of 645K. The news will come on the tails of the worse-than-expected NAR existing home sales figure that was released on Thursday, and the results will likely be similar. The pace of sales probably declined further, and it won’t help that lending standards have tightened, though mortgage rates have come down quite a bit. Traders will also be looking at the inventory component, as signs that supplies continue to build while demand wanes will suggest that prices have much further to fall. This news will not be entirely surprising as the Federal Reserve’s emergency 75bp rate cut on January 22 was accompanied by a statement that noted “incoming information indicates a deepening of the housing contraction.” Still, worse-than-expected readings may only lead the markets to price in another round of rate cuts by the central bank on January 30. However, the vote for the most recent reduction in the fed funds rate had one dissenter, William Poole, who “did not believe that current conditions justified policy action before the regularly scheduled meeting next week.” Nevertheless, fed fund futures are still pricing in a 76 percent chance of a 50bp cut to 3.00 percent, and as a result, a worse-than-expected new home sales report could exacerbate market speculation about the bank’s next move as signs continue to suggest that the US economy is in or nearing a recession.

Bonds – 10-Year Treasury Note Futures

The Fed’s emergency 75bp rate cut added fuel to the Treasury rally, but with the contract looking overbought it appears that a blow-off top may be in place. While weak new homes sales figures could push US bonds higher, Treasuries may instead fall towards support at 115-15 and 114-32, especially if equity markets continue to recover. On the other hand, if traders become more aggressive in pricing in another round of rate cuts on January 30, Treasuries may rally again towards the recent high of 119-05, while the 2003 high of 121-03 looms above.

FX – EUR/USD

The Federal Reserve’s emergency rate cut helped propel EUR/USD up towards 1.4900, though the pair has since backed off slightly from resistance at 1.4785. However, with fed fund futures pricing in another round of rate cuts next week and the European Central Bank maintaining a staunchly hawkish tone, it may only be a matter of time before the pair resumes its rally towards the record highs and the psychologically important 1.50 level. Furthermore, markets will likely remain extremely volatile and create choppy price action across the majors, but Monday’s US economic data could weigh on the greenback as new home sales are forecasted to fall back further. Indeed, gloomy US news along with the ECB’s hawkish stance could send EUR/USD surging higher. On the other hand, risk aversion – a major driving force market-wide – could spark sharp sell-offs of EUR/JPY and lead EUR/USD lower as well.

Equities – Dow Jones Industrial Average

Has the Federal Reserve staved off a stock market crash? One may believe so by looking at the Dow’s bounce from Tuesday’s lows, as the 12,000 level served as a springboard for the index, and market sentiment turned more optimistic. Indeed, Congress and the White House have come to agreement on an economic stimulus plan that will utilize $150 billion in an effort to boost consumer and business spending. However, it is questionable how much the government’s plan and the Fed’s policy actions will really help US stock markets, which are more likely in need of a deep correction lower. Nevertheless, the markets may continue to buy up stocks on Friday, but with resistance for the Dow looming near 12,500, upside potential for the index could be limited.

Terri Belkas is a Currency Strategist at FXCM.