US Personal Spending (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.2%

US Personal Income (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.5%

What Are The Markets Facing?

Yesterday, Ben Bernanke testified that the Fed still sees considerable downside risks to the U.S economy and signaled that future rate cuts are forthcoming. The upcoming personal spending and income numbers may confirm those concerns and end any debate that the U.S. is in a recession. Personal spending is expected to maintain its weakest pace since June printing at 0.2% for the second consecutive month, as U.S. consumers are feeling the affects of their declining wealth due to the housing slump. If the recent decline in retail sales, confirmed by Sears reporting today that their revenues declined 47%, is any indicator, we may see a weaker number than expected. Consumer spending power which has been sapped by record oil prices and rising inflation is expected to be weighed down further as personal income is expected to slow to 0.2% from 0.5% the month prior. After equity markets were uninspired by the prospect of future cuts, it is very clear that investors have come to the conclusion that the U.S. is in a recession. Additionally, there is growing fear that the Fed’s breakneck pace of rate cuts will lead to stagflation.

Bonds – 10-Year Treasury Note Futures

Treasuries are forming a falling wedge and may break out with upside potential to 118.00. After Fed Chairman Bernanke signaled that future rate cuts are in store, treasuries should see the contract bid up. Declining personal Income and spending will only bolster this case. However, a surprise to the upside of the U.S. data may be enough to derail the potential rally and send bonds lower.

FX – EUR/USD

The Euro has continued to make fresh all-time highs after Fed Chairman Bernanke’s testimony yesterday signaled more rate cuts are in store. The pair broke the mythical 1.50 barrier after Vice chairman Kohn first signaled the Fed’s dovish stance and continues to rally, setting an all-time high of 1.5148 this morning. Two reports due out Friday are expected to fuel Euro bull sentiment as personal income and spending are expected to show that considerable downside risk remains to the U.S economy. The statistical mix of slow wage growth and falling home prices have taken a toll on consumers, and any further deterioration in these indicators will signal the U.S. is already in a recession. Although traders may look to take profits after the latest rally, Jamie Saettele’s latest report on the EUR/USD pair sees near-term support at 1.4981 and “plenty of upside potential.” The Fed will be closely monitoring all fundamental indicators and stronger than expected consumer data may lesson their zeal to cut rates and reverse the current dollar rally.

Equities – Dow Jones Industrial Average

A daily chart of the Dow Jones Industrial Average shows that it has run into resistance at the 12,725 level. Friday’s release of US personal Income and personal sending could weigh on the Dow as consumers are feeling the pinch. Fed Reserve Chairman Ben Bernanke’s testimony Wednesday proved that the Fed would maintain a dovish posture as economic weakness persists, but it didn’t inspire investors as the market closed relatively unchanged. Despite the fact, that further liquidity in the market could enhance growth prospects for many on Wall St and perhaps lend support to falling home prices as mortgages are at the heart of the credit crisis. The Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae and Freddie Mac, said it would move ahead with a plan to remove the cap on the value of mortgages they could buy. The move is anticipated to increase liquidity in the housing industry. Reports of the plan sparked a rally in financials and homebuilders yet fears about the overall health of the economy capped continued strength. Weak consumer spending and income data may spark an equity sell off, as the U.S consumer has been carrying the economy in light of all its problems. Stronger than expected data may reignite the belief that the U.S. consumer is resilient enough to keep the economy afloat until the recent and expected rate cuts have their intended affect, and rally equities through resistance.

Terri Belkas is a Currency Strategist at FXCM.