Existing Home Sales Sets The Pace For Housing And The Fed Countdown

Existing Home Sales (MAY) (14:00 GMT)
Existing Home Sales (MoM) (MAY) (14:00 GMT)
Expected: 5.97M
Expected: -0.4%
Previous: 5.99M
Previous: -2.6%

How Will The Markets React?[/B]
The housing market?s place in the US economy is well known by economists, traders and especially policy makers. In the past few month?s worth of data, sales, inflation and construction numbers seem to have lost their potency in the fundamental arena. However, the tables may turn starting Monday with the National Association of Realtors? existing home sales numbers. With a Fed decision and the final revision of first quarter GDP due a little later in the week, the housing sector will come back into focus. For expansion, the worst slump in housing in 16 years has been the biggest weight for a pace of annual growth at a four-year low 0.6 percent. This in turn has put the Federal Open Market Committee in a difficult position. Policy officials continually warn that inflation is uncomfortably high; yet the drop in growth has stoked cries for rate cuts to provide some relief. Now, the market is in a holding pattern to see if the housing depression will outlast the buoyant inflation trends or visa versa. Looking to the consensus for the existing home sales report, the former scenario is still on track. Purchases of previously owned homes are expected to have contracted 0.3 percent to 5.97 million on an annual basis through the month of May. This would depress the gauge to a new four-year low. Previously released data supports this outlook. The NAHB home builder sentiment report for June hit a 16-year low as delinquencies and lending rates rose, while the existing home sales number itself dropped 2.1 percent a month back. What?s more, the outlook doesn?t look any brighter. Inventories are still at their highest levels since 1992, mortgage rates are at yearly highs and the fall out from the sub prime sector is ongoing.
[B]Bonds - 10-Year Treasury Note Futures[/B]
Treasuries have traced out a steep decline over the past few weeks with seemingly little backing from fundamentals. For a brief period in fact, the benchmark ten-year note?s yield was actually greater than the Fed Fund rate - something that hasn?t happened since policy makers first started to increase the benchmark lending rate two years ago. However, the good times may be coming to an end. Treasuries have seen a marked rebound as the high returns the paper boasts attracts capital. Looking at futures on the T-note, the strong bounce from 103-20 lows has opened the door to a return to 105-13. The bullish trend in yields (bearish for prices) has not come to an end just yet though. The falling trendline in the chart below is still intact as fundamental activity heats up.

[B]FX - Dollar Index Futures[/B]
The majors are starting to diverge as the dollar succumbs to carry trade cross winds and unscheduled economic forces. However, these modest divergences have not masked the greenback true direction. EURUSD is a good guide for dollar-based price action. The pair broke modest resistance at 1.3440 to target the next psychologically significant round figure. Following suit, GBPUSD cleared the way for a new six-week high, though 2.0 stands as a big wall for bulls to overcome. When we get to the commodity block though, it is clear the dollar is still considerably oversold on the long-term. USDCAD is near three decade lows, NZDUSD is at highs not seen in over twenty years and AUSUSD is near the same record. So to pull all this together, the Dollar Index gives a better picture of the greenback. The pair is not far from a double test of multi-decade lows around 81.25; and the rebound from this basement level looks to be in jeopardy. A big falling trendline beginning with the highs back in November of 2005 has proven a worthy barrier for the index. What?s more, with Friday?s action, the nearest level of notable support has given way. Now on its way back towards the 81.70 swing low, fundamentals will determine whether the market will accelerated declines or put the currency back on track to attempt another assault on resistance. Monday?s existing home sales number is not likely to test major support or resistance, though it can set up a break for another indicator or event scheduled later. All the housing data on the docket is expected to worsen, which could help bring spot down to 81.70, or even 81.25, to set up the final stroke for the FOMC?s rate decision or the following week?s NFP report.

[B]Equities - S&P 500 Index[/B]
While the housing market doesn?t seem to be driving treasuries or the dollar on any serious moves lately, it is all equities traders have been thinking about. While depressed growth has long been a concern for investors nervous about consumer spending the effect on medium-term revenues, the housing sector?s pain has taken on a new level of urgency recently. Record foreclosures, a jump in defaults and a drop in prices and sales are starting to spread beyond the directly-related industries. The latest victim to the housing slump is the financial sector. Big banks have been building a house of cards through packaging risky loans into securities and further building a huge derivatives market on top of it. The glory days of higher returns from these risky assets may be quickly coming to an end though if more problems like the one Bear Stearns is having pop up. One of the largest financial firms in the world, Bear Stearns has been the subject of many headlines recently as it struggles to save two internal hedge funds that are floating drawdowns estimated to be over 20 percent. Other firms that have exposure to the possible implosion like Merrill Lynch, JP Morgan and Lehman Brothers have started to sell off their collateral to limit their risk. This may exacerbate the problem. Today, shares of Bear Stearns dropped $2.06 to $143.75, guiding the financial services sector of the S&P 500 to a 2.9 percent loss for the week.
The financial group seems to have a lot of clout in the broad indices with the S&P 500 marking its biggest weekly decline since the beginning of March. So where does this leave the markets for Monday? The S&P 500 is steeped in a steep slide, closing the week out near its lows. For the bigger picture, the highs the index put in at the beginning of the week never reached the 1,540.56 high put in at the beginning of the month. To really cast doubt on the sustainability of bullish sentiment, a move that breaks below the 1,487.71 swing low would open the door to bearish momentum. Such a move could ride the bearish housing wave. Already sensitive to the woes of the sector, the hedge fund bailout could be made more pressing if existing home sales plunges Monday. If one indicator can trigger a repricing of the massive CDO market, a drop in revenues will be the least of the market?s worries.