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 sixteenth consecutive month. Later in the morning, the Conference Board’s consumer confidence index is forecasted to fall to a nearly 16-year low of 56.0 from 57.2, 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 steadily deteriorated, as the unemployment rate has ticked higher in recent months and things are only expected to get worse. As a result, more pessimistic sentiment does not bode well for consumption trends for the second quarter of 2008, but does not suggest that looser monetary policy is on the way. Indeed, fed fund futures are pricing in no change in rates following the Federal Reserve’s next meeting on Wednesday, and a 57.5 percent chance of a 25bp rate hike in September. Nevertheless, worse-than-expected house price readings and consumer confidence could lead the markets to cut back speculation of an increase in rates in the near-term, as economic conditions in the US may be feeble enough to force the central bank to ignore rising inflation pressures.

Bonds – 10-Year Treasury Note Futures

Treasuries remain very heavy as the markets price in the potential for a rate hike by the Federal Reserve, but the contract has recently run into support at 112. Upcoming US housing market and consumer confidence data could help Treasuries bounce higher, as both indicators are anticipated to decline. However, if the news is better-than-expected – particularly the consumer confidence release – Treasuries could tumble toward the December low of 111-16.

FX – EUR/USD

EUR/USD continues to trade within a wide range of 1.5350 – 1.5800, as the US dollar consolidates ahead of the Federal Reserve’s next rate decision on Wednesday. Looking ahead to Tuesday, US economic data could lead EUR/USD to bounce as home prices and consumer confidence are both anticipated to deteriorate further. If the news is particularly disappointing, the pair could hold above 1.55 and rise toward resistance at 1.5550/70 as traders cut back speculation that the Federal Reserve will hike rates by September. On the other hand, surprisingly strong figures could weigh EUR/USD down toward the recent lows at 1.5465 and the 100 SMA at 1.5440, especially if consumer confidence unexpectedly improves.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average stabilized above near-term support at 11,815 on Monday, but the trend in the index is clearly bearish. On Tuesday, US house prices are anticipated to fall, while consumer confidence is expected to turn increasingly pessimistic, all of which could weigh the DJIA down toward the March lows near 11,731. Furthermore, any indications of distress in the financial sector has the ability to trigger sharp sell-offs in the equity markets, adding to downside risks for the index. However, if consumer confidence proves to be better-than-expected, the DJIA could go on to consolidate between 11,815 and 12,000 in coming days.

Terri Belkas is a Currency Strategist at FXCM.