US Durable Goods And Home Sales Look To Fuel Dollar, Equity Rallies

Durable Goods Orders (APR) (12:30 GMT)
New Home Sales (MoM) (APR) (14:00 GMT)
Expected: 0.8%
Expected: 0.2%
Previous: 3.7%
Previous: 2.6%

How Will The Markets React?
The US financial markets have performed well so far this week considering the lack of a fundamental impetus from the economic calendar. This dry spell will finally come to an end Thursday though when the macro winds finally pick up with April readings of durable goods and new home sales. Tomorrow, the orders indicator will have an hour and a half head start on the housing data; so it will very likely shape investor sentiment for the remainder of the day. Bookings for goods with an expected life of three or more years are expected to have grown 0.8 percent last month. If realized, that would be the third consecutive monthly increase - a statistic that has not been recorded since June of 2005. However, the outlook itself is questionable since the Commerce Department?s indicator is notoriously volatile. This is a particularly valuable trait for those seeking volatility since surprises are commonplace. What?s more, fundamentalists will be even more invested in the release this time around as traders and analysts sort through all of the top tier indicators in search of confirmation for Fed Governor Ben Bernanke?s outlook of a rebound in growth. The durables report will give a view of business investment and manufacturing activity. With this in mind, a bullish surprise may be in store if there is a correlation between the new orders component of the ISM manufacturing report. After two quarters of burning off excess inventories, the demand sub-gauge hit a 14 month high in April. After the markets participants fully absorb the durable goods number, they will have to change gears and take in the New Home Sales report. This report is also expected to record a marginal increase. However, even a 0.2 percent increase would be impressive given the rise in default rates and the tightening of credit standards that Governor Bernanke said would weigh on the market through 2008.
Bonds - US 10-Year Treasury Note Futures
Yields on the benchmark ten-year treasury note hit a three-month high this morning even though there have been few events or indicators to facilitate such strength. No chart reveals the intensity of the treasuries move over the past few weeks quite like that of the nearby futures contract on the T-note. Only a few weeks ago, price action was ranging below 108-14. However, a last touch came complete with a massive reversal candle and a nearly 2 percent drop. After such a steep move, there seems to be no levels of support or resistance in the immediate vicinity. This may open the door to a big move on tomorrow?s data flow. If durable orders and housing both print better, 106-06 could be the next target. Alternatively, a turn higher on disappointments could be limited as it fights the trend.

The EURUSD has steadily declined from its late April highs of 1.3680 as the US dollar has slowly garnered strength, though the pair has started to back off upon approaching the 1.3400 level. The release of Durable Goods and New Home Sales could serve as an even greater road block, as both economic indicators are predicted to slow sharply in April. With softer Durable Goods potentially pointing to a decline in business investment and New Home Sales only reiterating the problems resounding throughout the housing sector, EURUSD traders may question how long the Fed can remain stringent on monetary policy and take the pair up to 1.3500 once again, especially amidst the major slowdowns in economic expansion in general.
On the other hand, central bankers have remained relatively hawkish, as non-voting Richmond Fed President Jeffrey Lacker said yesterday that it is the Fed?s responsibility to curb inflation and it would be a mistake to rely on slower growth to stem price increases, signaling that the Bank will likely leave rates on hold at 5.25 percent throughout the year. Should markets continue to perceive a tightening bias by the Fed, EURUSD could continue to ease within its channel to break down through 1.3400.

Equities - S&P 500 Index
US stocks fell for the first time in four days after tech shares suffered and former Federal Reserve Chairman Alan Greenspan warned that the stock market in China faces a “dramatic contraction,” leaving the S&P 500 to close down 0.1 percent to 1,522.28. Analog Devices, a maker of semiconductors used in everything from mobile phones to cars, led the decline as shares dropped 10 percent - the sharpest loss in nine months - to $36.39. Comments by Richmond Fed President Jeffrey Lacker likely didn’t help US equities either, after he said yesterday that it is the central bank’s responsibility to curb inflation and it would be a mistake to rely on slower growth to stem price increases, signaling that the Fed will likely leave rates on hold at 5.25 percent throughout the year.
Economic data out of the US could shake up the S&P 500 tomorrow, as Durable Goods and New Home Sales are both scheduled to be released. Both indicators are predicted to slow sharply during the month of April, with Durable Goods potentially boding ill for business investment and New Home Sales continuing to signal that the woes of subprime lenders have started to spread throughout the sector. Such results would be highly bearish for the economy and could easily take the S&P 500 down to a supporting trendline near 1,515.00. On the other hand, encouraging releases could propel the S&P?s rally even further to break through its recent highs of 1,532.43.