MAY 23 US Existing Home Sales (APR) (14:00GMT; 10:00EST)
Expected: -1.6% to 4.85M
Previous: -2.0% to 4.93M

What Are The Markets Facing?

On Friday, the National Association of Realtors is expected to report that existing home sales slipped to 4.85 million - the lowest reading since record-keeping began in 1999. Sales of existing homes account for nearly 85 percent of the market, according to NAR, so this particular release serves as a good indicator of the status of the sector as a whole. 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 minutes from Federal Reserve’s April policy meeting reflected extremely bearish sentiment on the housing sector and "participants saw little indication of a bottoming out in either housing activity or prices."

Consumption was also judged to be a soft spot for the US, and the "restraint on spending emanating from weakness in labor markets was expected to increase over coming quarters, with participants projecting the unemployment rate to pick up further this year and to remain elevated in 2009." Indeed, projections for the unemployment rate in 2008 were revised up to 5.5 - 5.7 percent from 5.2 - 5.3 percent. Likewise, real GDP forecasts for 2008 were slashed all the way down to 0.3 - 1.2 percent from 1.3 - 2.0 percent. Nevertheless, the Federal Reserve has clearly shifted to a neutral stance in light of the current inflation environment, and the even worse outlook. In fact, the two dissenters against the April rate cut, Richard Fisher and Charles Plosser, “felt the Committee should put additional emphasis on its price stability goal at this point” as another rate cut “could prove costly over the longer run." As a result, even if this next round of housing data is disappointing, it is unlikely to force the Fed’s hand into slashing rates further in June.

Bonds – 10-Year Treasury Note Futures

A daily chart of Treasuries shows the contract holding within a range of approximately 114 - 116, though the contract did pull back sharply the day after the release of the FOMC minutes reflected more hawkish sentiment within the Committee. Looking ahead to Friday’s data, however, disappointing US housing data could push Treasuries back above 115, especially if equities fall significantly. On the other hand, a surprisingly strong existing home sales report could weigh Treasuries down for a test of trendline support.

FX – USD/JPY

The USD/JPY remains range bound between approximately 103 and 105, though the 100 SMA – which has served as formidable resistance in the past – has now fallen to 104.45, which could limit further gains in the pair. Indeed, according to Technical Strategist Jamie Saettele’s Daily Technical Report on Thursday, “a bearish bias is warranted against 104.68. The potential for a sizeable decline in a 3rd of a 3rd wave within the bear cycle from 105.70 is what keeps us patient.” Lately, the USD/JPY pair has had two distinct drivers: risk trends and US data. On Thursday, a small rebound in the DJIA has helped lift the pair higher. However, Friday’s release of US existing home sales could weigh on both the US dollar and US equity markets, which could prove to be twice as dangerous for the USD/JPY pair in particular. In fact, existing home sales are forecasted to fall to the lowest level on record, suggesting that the sector’s collapse is far from bottoming out. On the other hand, if the index proves to be stronger than expected, the USD/JPY rally could accelerate to target 105.50.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average fell sharply this week from resistance at the 200 SMA and the psychologically important 13,000 mark, though the decline recently ran into support at the 100 SMA at 12,534. However, the decline on Tuesday and Wednesday came amidst higher volumes, suggesting that the turn from 13,000 was a decidedly bearish move and is indicative of additional losses. Indeed, where the DJIA goes from here will have major implications for many markets – including other stock markets and forex carry trades – but it may be determined more upon shifts in risk appetite rather than economic data. As a result, traders should keep an eye on any news from the financial sector or regarding the credit markets that may trigger a return to risk aversion, as this could weigh heavily on the DJIA. Friday’s release of US existing home sales may also play a role in price action, especially if the news is worse than expected and signals that housing prices are likely to fall even lower. On the other hand, a surprisingly strong figure could help prevent more sizeable declines in the DJIA in the near-term.

Terri Belkas is a Currency Strategist at FXCM.