US GDP Annualized (4QF) (12:30 GMT; 08:30 EST)
Expected: 0.6%
Previous: 0.6%

US Personal Consumption (4QF) (12:30 GMT; 08:30 EST)
Expected: 1.9%
Previous: 1.9%

What Are the Markets Facing?

Upcoming fourth quarter GDP and personal consumption final readings aren’t expected to deviate from their preliminary numbers. However, the recent trend for U.S. fundamental data has been to severely disappoint, with consumer confidence, home prices and durable goods orders underwhelming. Since, both numbers disappointed against original expectations any deviation to the downside should spark recession fears and lead to traders increasing their bets that another Fed rate cut is forthcoming. Many experts have already started to predict that a 50 point cut is likely in the works at the central bank’s next meeting. The disappointing consumer confidence print and the unraveling of the Clear Channel privatization deal have wiped away the goodwill the FOMC bought with its Bear Stearns bail out and 75 point cut. Although many expect that the culmination of the MPC’s actions to date will loosen up the sticky credit markets and fuel future growth, until they see more validation skepticism will prevail. The preliminary GDP measurement, showed the only thing that may have saved the economy from a quarter of negative growth and half way to confirming a recession was increased exports. However, last bastion of hope for the economy may have fallen with the durable goods orders report showing a 2.8% percent drop in the shipping index, as expectations were a weak dollar would spark demand for U.S. goods.

Bonds – 10-Year Treasury Note Futures

Treasuries failed to break support at the 117.15/20 level after a five year low in consumer confidence curbed investor’s appetite for risk. Additionally, the failed Clear Channel privatization deal demonstrated that the credit crunch is far from over. The upcoming final GDP fourth quarter measurement is expected to confirm the preliminary reading of 0.6% growth. Any revision lower from the provincial number will reignite recession fears and push the contract higher. Conversely, an unexpected increase in growth will fuel risk appetite and send treasuries back toward support.

FX – EUR/USD

The EUR/USD broke through the 1.57 handle as the surprising jump in German business confidence eliminated any hope that the ECB would weaken in their hawkish stance. Then President Trichet reaffirmed his focus on price stability when he recently addressed the European Parliament squashing any remaining doubts. U.S. fundamental data has continued to disappoint with consumer confidence and durable goods printing lower than expected and raising the probabilities that Bernanke will cut rates again at the Fed’s next meeting. As the interest differential continues to widen, the EUR/USD will continue to gain support, making a retest of all time highs and a break above the 1.60 handle a distinct possibility. A lower than expected print to the final GDP 4Q number may give Euro bulls all they need to try and bid up the pair to new levels. Although, a better than expected print may slow the Euro’s short term momentum, it may not be enough to derail it from eventually setting fresh all time highs.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average was virtually flat after a five year low consumer confidence report, and housing data showed further declines in prices. Trader’s came to the reality that despite all of the Fed’s recent actions, there still remains significant underlying fundamental weakness and downside risks, which will be increased after the consecutive decline in durable goods orders. Many believed that the central banks dramatic 75 point rate cut at the beginning of the year would be enough to provide stability to the equity markets, but that hasn’t been the case as liquidity issues have jeopardize a complete systematic failure in the banking industry. Therefore, investors will proceed with caution until they get confirmation that these issues are behind them. The upcoming GDP and personal consumption reports aren’t typical market moving events since they rarely deviate from their preliminary readings. However, the markets have been overreacting to every bit of news and a surprise to the upside in either of these indicators may be enough to inspire investors to increase their bets pushing the index to test resistance at 12765. Again, worse than expected results may send investors crawling back into their shells as fundamental concerns remain.

Terri Belkas is a Currency Strategist at FXCM.