Durable Goods Orders (DEC) (13:30 GMT; 08:30 EST)
Expected: 1.6%
Previous: -0.1%

Consumer Confidence (JAN) (15:00 GMT; 10:00 EST)
Expected: 87.0
Previous: 88.6

What Are The Markets Facing?

On Tuesday, the release of US economic data will likely highlight some of the reasons why traders are ramping up speculation that the country is in midst of a recession. Indeed, while durable goods orders for December are anticipated to surge 1.6 percent, this may be led primarily by transportation as Boeing orders jumped to 287 orders during the month up from 177 in November. Meanwhile, durable goods excluding transportation are forecasted to rise a very tepid 0.1 percent after falling 0.8 percent during the month prior, as fears of a global economic slowdown may derail corporate spending figures. Later in the morning, the Conference Board’s consumer confidence index is forecasted to fall to a two-year low of 87.0 from 88.6, which won’t be entirely surprising as rocketing food and energy prices combined with the collapse of the US housing sector and tightening credit conditions have sparked widespread pessimism throughout the financial markets. Furthermore, the labor markets have started to deteriorate, as the unemployment rate has slowly ticked higher in recent months and things are only expected to get worse. As a result, retail sales contracted during the month of December – a time of year when heavy discounting and major promotions ahead of the holidays tend to spark a surge in spending – which does not bode well for consumption trends for 2008. Disappointing readings in one or more of the day’s indicators will likely lead the markets to be more aggressive in their pricing in of 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 an 86 percent chance of a 50bp cut to 3.00 percent, and as a result, a worse-than-expected durable goods or consumer confidence 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 durable goods and consumer confidence 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.

FX – EUR/USD

The Federal Reserve’s emergency rate cut helped propel EUR/USD up towards 1.4900, though immediate resistance sits above at 1.4800. However, with fed fund futures pricing in another round of rate cuts on Wednesday and the European Central Bank maintaining a staunchly hawkish tone, it may only be a matter of time before the pair takes 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 Tuesday’s US economic data could weigh on the greenback as consumer confidence is forecasted to fall to a two year low while durable goods orders could disappoint. 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, pending Senate approval, an economic stimulus plan may be implemented 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 Tuesday, but with heavy resistance for the Dow above at 12,500, upside potential for the index could be limited.

Terri Belkas is a Currency Strategist at FXCM.