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On Wednesday, US economic data is expected to continue to deteriorate, as durable goods orders for the month of April are forecasted to fall 1.5 percent. Although, the headline number is expected to decline for the third month, focus will be on the ex transportation measure, as a 1.5% gain the prior month for the stripped down number was more than enough to get traders excited.
What Are The Markets Facing?
On Wednesday, US economic data is expected to continue to deteriorate, as durable goods orders for the month of April are forecasted to fall 1.5 percent. Although, the headline number is expected to decline for the third month, focus will be on the ex transportation measure, as a 1.5% gain the prior month for the stripped down number was more than enough to get traders excited. Indeed, recent regional Federal Reserve reports have reflected diminishing shipments and new orders for manufacturers, especially in the Richmond, New York and Philadelphia areas. If this report shows that demand for durable goods remains weak, the news will only add to evidence pointing toward a US recession, as U.S. consumer confidence fell to 57.2 – a 15 year low. However, it may not do much to shift expectations for the FOMC's June 25 meeting, as inflation concerns on the back of record oil prices will make it prohibitive for a rate cut. In fact, fed fund futures are pricing in a 92 percent chance that the FOMC will leave rates unchanged at 2.00 percent. Yet, traders may be too optimistic about the economy, as they are pricing in a 26% chance of a rate hike at the September meeting. A drop in durable goods combined with recent dour housing data should reduce those odds significantly.
Bonds – 10-Year Treasury Note Futures
Treasuries continue to consolidate tightly in the middle of the current five week trading range of 114-09 to 116-20. The 40 day SMA crossed below the 100 day SMA for the first time in several months which may signal that prices may break lower. However, recent U.S. fundamental has been supportive of the 10 year note, which may continue with the upcoming durable goods orders release. Expectations are that the headline number will decline for the third straight month, which will revive recession talk and may send prices upward from their current range. However, an improvement particularly in the ex transportation print will weigh bonds lower.
FX – EURUSD Pair
The recent dour housing fundamental data has fostered USD bearish price action sending the pair to test 1.580 before falling to resistance. The pair has been trading in an upward channel since it tested 1.530 on May 8th. That was when ECB's started to reaffirm its hawkish stance and raised speculation that the central bank may raise rates in the future. A drop in durable goods orders will raise recession fears and lead to speculation that the Fed may have to continue their easing by the end of the year. The prospective increase in interest rate differential may see dollar bears try and push the pair to break through resistance at 1.5800 and retest 1.600, after its recent failed attempt. A gain in new orders for a consecutive month in the ex-transportation print may lead to bullish dollar price action look to test support at the current trend line.
Equities – Dow Jones Industrial Average
The Dow Jones Industrial Average is coming off its largest weekly drop since February 8th, 2008, breaking below its recent upward trading channel. Traders watched oil prices surge above $138 a barrel and feared the damage it would do on the economy. Consumers continue to see their purchasing power dwindle while companies watch their margins shrink, which will continue to weigh on future growth. The continued deterioration of the housing sector has made traders weighed on trader’s minds, until the sector stabilizes the possibility of a recession looms. The expected 1.5% decline in durable goods orders may weigh stocks further, as last time the indicator realized a similar fall in February, the Dow fell over 100 points on the news. Conversely, another strong reading could evaporate recession fears and offset the recent dour housing data leading to a rebound in equities.
19:46
Posted on May-28-2008
