S&P/Case-Schiller HPI (YoY) (4Q) (14:00 GMT; 09:00 EST)
Expected: -9.4% to 169.6
Previous: -4.5% to 180.5

Consumer Confidence (FEB) (15:00 GMT; 10:00 EST)
Expected: 82.0
Previous: 87.9

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, the S&P/Case-Schiller index of home prices is likely to fall sharply for the fourth consecutive period in the fourth quarter to the lowest level in nearly three years. Later in the morning, the Conference Board’s consumer confidence index is forecasted to fall to a more than four-year low of 82.0 from 87.9, 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 for the second month in a row in January, which does not bode well for consumption trends for the first half of 2008 but does suggest that looser monetary policy is on the way. However, the vote for the most recent reduction in the fed funds rate had one dissenter, Richard Fisher, who “felt that monetary policy was already quite stimulative” given the emergency 75bp rate cut on January 22 which brought the funds rate down 175 basis points since September. Nevertheless, fed fund futures are still fully pricing in a 50bp cut to 2.50 percent, and as a result, worse-than-expected house price readings consumer confidence 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

Treasuries have not been able to continue the rally from 115-10 as the 20 SMA at 116-20 provides resistance. Unsurprisingly, upcoming US data will likely work in favor of a recovery in Treasuries, as the S&P/Case-Schiller house price index and the Conference Board’s consumer confidence index are both expected to fall lower, which may lead traders to ramp up speculation that the US is in or nearing a recession. On the other hand, if US stock markets rebound in the near-term, Treasuries could fall through near-term support to target the 115-10 level once again.

FX – EUR/USD

The recent rally in EUR/USD pair has been driven by the Federal Reserve’s reaction to US economic weakness, as the minutes from the central bank’s January meeting suggested that additional rate cuts loom on the horizon. Thus far, the 1.4870 level has proven to be a point of resistance for the pair since November as it has traded higher but not been able to post a daily close above. Upcoming economic news out of the US may help to spark additional EUR/USD gains towards 1.50 this week, as housing data is anticipated to deteriorate further while the Conference Board’s consumer confidence index is expected to plummet to a multi-year low of 82.0 from 87.9. However, if EUR/USD is not able to make a sustained break through 1.4870 and trendline resistance at 1.4886, euro bears may take the opportunity to push the pair back down towards 1.4700.

Equities – Dow Jones Industrial Average

US equity markets have been in a downward trend since October as deteriorating economic data leads fears of a recession to build. Upcoming news could weigh on stocks, as housing sales and prices are forecasted to tumble while consumer confidence is anticipated to plunge, which does not bode well for the domestic economy as consumer spending represents approximately 70 percent of GDP. Meanwhile, a daily chart of the Dow Jones Industrial Average shows price consolidating within a pennant formation, and given the sharp declines that preceded the recent moves, a bearish breakout is likely. However, if price holds above near-term support at 12,300 and manages to find a bid tone to break above 12,500, the index may target trendline resistance at 12,660.

Terri Belkas is a Currency Strategist at FXCM.