US Markets May Lose Steam If Consumer Sector Cools

Consumer Confidence Survey (MAY) (14:00 GMT; 10:00EST)

           Expected:                        105
           Previous:                         104

How Will The Markets React?
Though many traders in the western world are still on their extended vacations, the restless markets are already preparing for the open of US capital markets on Tuesday morning. What will be a very busy week for the US calendar begins with tomorrow?s Consumer Confidence Survey conducted by the Conference Board. According to the consensus among economists?, sentiment among the populace is expected to have notched slightly higher this month as employment and equity trends hold steady. The most accessible evidence for a rebound from the Conference Board?s indicator is the strong performance of the University of Michigan?s sentiment report for the same period. The preliminary reading on the gauge crossed the wires at 88.7, the first improvement in four months. The same components that boosted the UMich number will most likely prop tomorrow?s number. Certainly, one of the most promising factors for optimism will be the recent performance of domestic equity markets. The bellwether Dow Jones Industrial Average has consistently produced new record highs and overtaken round numbers that are often times considered psychological barriers. More doubtful in its contribution to optimism for May will be the labor market. In the past few months, national payrolls have begun to ebb while the Labor Department actually revised previous prints lower for the first time in years just last month. On the other hand, the more timely initial jobless claims numbers have dipped to their lowest levels in a year through the first half of May. While labor support is uncertain, the weakness in housing and the record gasoline prices will almost surely depress confidence. Prices at the pump reached a new record high last week of $3.21 a gallon and the summer driving season has just begun. Traders will be watching tomorrow?s sentiment report closely since the consumer sector is the last pillar of support for growth and inflation.
Bonds - US 10-Year Treasury Note Futures
Treasury yields settled off of their steady advance going into the holiday weekend. Things may change quickly for the market though on Tuesday when traders get their first taste of economic data. Over the past two weeks, T-Notes have found a very consistent trend despite a blatant lack of Fed-specific indicators. The coming week will provide exactly the opposite - a docket that will supply nothing but top-tier reports that have direct ties to monetary policy. Before traders jump on the GDP revision, ISM manufacturing or NFP report due later this week, they will process Tuesday?s consumer confidence report. The official consensus is touting a modest pick up. However, to keep the steady trend in tact and take out support at 106-06 in futures, it may take a very strong number indeed.

The steady descent of USDCAD has ignored any of the US dollar?s recent strength, as the pair continues to hit new 29 ½ year lows. Amidst thin US holiday trading, the pair has steadied near 1.0800. Is USDCAD taking a breath before diving lower or is the pair preparing to turn? The combination of technicals and fundamentals could be just the right mix to lead USDCAD to retrace, as US consumer confidence is expected to improve to an index reading of 105, despite the fact that gasoline prices have breached record highs. There are two additional factors that could lead to a USDCAD bounce: 1) The end of a two-day strike at Nigeria’s state-run oil company led crude for July delivery to fall as much as 1.3 percent to $64.36 a barrel in after-hours trading on the New York Mercantile Exchange. 2) The Bank of Canada is anticipated to leave rates steady at 4.25 percent, but markets are also expected a hawkish policy statement as inflation remains elevated. Should the central bank actually signal that they are content with leaving rates steady or foresee a drop in CPI in the near-term, bulls may turn their back on the Canadian dollar as the currency is vastly overbought. On the other hand, the combination of weaker-than-expected US sentiment and an overtly hawkish Bank of Canada policy statement could prove disastrous for USDCAD and lead the pair as low as 1.0700.

Equities - S&P 500 Index
US equity markets were closed for the Memorial Day holiday on Monday, and trading for the remainder of the week could remain thin. Nevertheless, the release of US consumer confidence could help lead the S&P 500 back to its recent highs of 1,532.43, as the index is anticipated to improve in the month of May after falling to an eight month low in the month prior. However, the S&P 500 index dipped below an ascending trendline last Thursday, so gains may have trouble bypassing resistance. On the other hand, a softer-than-expected reading is very possible, as record high gasoline prices and signs that the Fed will leave rates on hold throughout the year, and has to potential to drag the equity index below 1,500.00.