cross markets data reaction

Dollar, Stocks And Treasuries Look For More Volatility From New Home Sales

Saturday, 24 March 2007 00:25:41 GMT  |  John Kicklighter, Currency Analyst

New Home Sales (FEB) (14:00 GMT)	New Home Sales (MoM) (FEB) (14:00 GMT)
Expected:                 985K	Expected:                   5.1%
Previous:                  937K	Previous:                 -16.6%

How Will The Markets React?

As predicted in Thursday’s Cross Markets Data Reaction report, the existing home sales report for February was met with some level of skepticism. Though the indicator hit the wires with quite the surprise, traders in both the Treasury and equities markets moved their respective asset little considering the reports divergence with predictions. According to the National Association of Realtors survey, the number of existing home sales in February jumped 3.9 percent to a 6.69 million pace. In historical terms, this was the biggest boost in sales in three years and the fastest pace in seven months. At the same time, last month’s improvement was not merely a natural rebound from a sharp January contract; rather it followed another significant rise. What does that mean for the market-moving potential of Monday’s new home sales indicator from the Commerce Department? Looking back at the previous release on February 28th, it is hard to judge the effect the housing number had on the market. The January report delivered a shock to the US financial markets when it printed a massive 16.6 percent drop in sales of previously unoccupied residences – the biggest monthly contraction since 1994. However, price action immediately following the number was not what was expected of such a substantial disappoint. Tempered by previous, monthly improvements and weather related delays; the reduction in activity was not far removed from the trend that most economists have been pointing out for some time. This time around, the markets seem to have all the evidence they need for formulating their valuations of the housing sector. In the past week, investors have overlooked strong February housing starts and existing home sales in favor of indicators are considered more topical like the NAHB Market Index and building permits. Furthermore, most savvy market participants know that the sub-prime mortgage shake up didn’t take full effect until early March.

Bonds –10-Year Treasury Note Futures

Treasuries moved little Friday in response to the outperformance of the existing home sales report. On the unexpected improvement in the housing market, the nearby futures contract for the ten-year note slid as would be expected. However, the dip made little effort to overtake the 108-07 support levels that has been in place for nearly a month. For fundamentalists, the housing report did not have the economic oomph needed to truly nock the Federal Reserve off of its steady path. While housing has considerable tout in overall growth, the pick up in sales seems more of a natural response from consumers as they take advantage of cheap prices. On the other hand, with inventories still bloated, there is little chance it will revive the overall sector. The same sentiment may hold for the new sales data.






FX –EUR/USD

In comparison to equities and debt, the currency market drew considerable momentum on Friday’s better-than-expected housing data. Pairs like GBPUSD, USDCHF and EURUSD marked gains for the dollar. However, the moves themselves were no greater than those seen on Thursday when the Leading Indicator index and initial jobless claims were the only scheduled releases running across the tapes. In fact, this move was more likely the product of continuation from the previous day’s turn on major levels of dollar support than a fundamental change in dollar traders’ outlooks for economic expansion or Fed policy.

For EURUSD, the turn followed a rejection of 1.3400. At the same time, the rebuff and subsequent extension through the end of the week holds some weight for the pair’s technical picture. With Friday’s 50-point drop, EURUSD has officially cleared a trend channel that has contained price action for nearly two weeks. Now, currency traders will have to evaluate both the technical and fundamental setup when attempting to position themselves for Monday’s new home sales report. On the one hand, the fundamental potential of the housing sector indicator is reserved at best. As market participants continue to assess the damage report from March’s jump in distressed mortgage default rate, they have little patience for lagging indicators that print modest improvements. Alternatively, if there was a drop in new home sales in February, it may add fuel to the bearish outlook that is growing for the coming months’ reports. Conversely, if the indicator generates little interest fundamentally, traders will quickly turn to chart patterns to guide them. If dollar bulls can generate enough of a run to take out 1.3250, the next major target will be 1.3100.






Equities – S&P 500 Index

In five day, the major US stock indices have climbed over 3 percent and recovered nearly all of their losses since the late February break. However, buyers seem harder and harder to find as the previously set multi-year highs come back into view. On Thursday, the first serious hurdle was surpassed when a range high, the 50-day and 100-day simple moving averages were all overtaken in one fell swoop. This move was instigated on the late afternoon FOMC rate decision where a predictable pass on changing the overnight lending rate was accompanied by a cooling in the inflation outlook. While the alterations were relatively subtle, it was all that was needed to unleash the bullish pressure that had been building since the beginning of the week.

Recently though, the bull has grown winded. On Friday’s unexpected surge in existing home sales, the S&P 500 barely pulled its head above the water. Like all financial markets the world over, this disconnect between fundamentals and price action suggests US stock investors are wrestling with sentiment that is too pervasive for a single indicator to correct. For Monday, the equities market will have to once again decide the housing sector’s place in the ever evolving valuation process. Another positive surprise from the new home gauge comparable to the existing numbers could put the bulls back in charge. However, how far the optimism may be carried would depend on the updated assessment of the sub-prime mortgage sector. Then again, if the indicator prints soft as expected, their will be one more anchor weighing on an ascent that is already struggling for ground.

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