US Dollar, Treasury Yields May Suffer If Dismal Housing Data Prevails

[B]NAHB Housing Market Index (JUN) (17:00 GMT; 13:00 EST)[/B]
[B]Expected: 30
Previous: 30[/B]

[B]How Will The Markets React?[/B]
US dollar and Treasury yield gains have slowed quite a bit now that weaker-than-expected core CPI figures have hit the markets, as there is far less support for the Federal Reserve?s overtly hawkish stance. Furthermore, conditions in the housing sector appear to be worsening, which hurts the case for a rebound in expansion later in the year as Fed Chairman Bernanke forecasts. In fact, RealtyTrac indicated that foreclosures surged a whopping 90 percent in May from a year earlier, while the Mortgage Bankers Associated reported a pick up in subprime mortgage delinquencies. Given the sheer amount of negative reports regarding the sector, homebuilders are not likely to be entirely optimistic regarding demand for homes, creating significant downside risks for the NAHB housing market index due to be released on Monday afternoon. Estimates are for a steady reading, which would not make many waves in US markets, but if we see a very disappointing figure, US dollar and Treasury yield declines could ensue while limiting support for the S&P 500.
[B]Bonds - US 10-Year Treasury Note Futures[/B]
US 10-Year Treasury futures saw a healthy bounce on Friday as softer-than-expected core CPI diminished prospects for a Federal Reserve Rate hike later in the year. However, resistance at 104.25/30 has limited further gains, but the release of US housing data could jumpstart price action once again next week. The NAHB index is anticipated to hold steady, but given the dismal news we?ve seen from the housing sector lately, there is significant downside risk for the release. An unexpected plunge could continue to hurt prospects for policy tightening by the Fed and perhaps even lead the markets to consider the possibility of rate cuts once again, which would subsequently propel Treasury futures through near term resistance at 105.01 towards more lofty targets of 106.00.
[B]US 10-Year Treasury Note Futures (Daily Chart)

The US dollar faltered against most of the majors on Friday amidst the release of softer-than-expected core CPI, however, USDJPY continued to prosper after the Bank of Japan left rates on hold and signaled a more extended pause on monetary policy action. In fact, the pair has been reaching new 4 ½ year highs as the carry trade remains the preferred position of the markets. While a break of 124.00 almost appears unavoidable, the release of the NAHB housing market index could slow the ascent. The figure is anticipated to hold steady, but there is substantial risk of a decline given the widespread weakness throughout the sector. A major disappoint could lead USDJPY down towards the 123.00 level, but it would take a major event (very hawkish BOJ commentary, Chinese trade/yuan news) to take it much further. On the other hand, a steady NAHB reading or an improvement would support further gains for the pair to the 124.00 level.
[B]USD/JPY (Daily Chart)

[B]Equities - S&P 500 Index[/B]
US stocks rallied on Friday after core consumer prices rose less than forecast, easing concern that interest rates will increase. The S&P 500 added 0.7 percent to close at 1532.89, with utilities leading the index as the yield on the benchmark 10-year Treasury note fell about 6 basis points. Exelon, the largest operator of US nuclear power plants, added $1.69 to $74.48 while PPL Corp., owner of Pennsylvania’s second-biggest utility, rose $2.01 to $46.72 after its board authorized a $750 million share buyback.
With the S&P 500 so close to resistance at 1,540.00, the index may have difficulty working higher, especially if the NAHB housing index takes a hit and highlights the weakness of the housing sector. While the housing indicator isn?t necessarily market moving enough to lead to a large pick up or decline in the S&P, a surprising figure could exacerbate price action. However, estimates are for a steady reading, and a result in line with expectations is not likely to even cause a ripple in the index as equity news will prevail.
[B]S&P 500 Index (Daily Chart)