cross markets data reaction

US Dollar, Equities And Yields Traders Position For Strong Durable Orders

Tuesday, 27 March 2007 22:34:47 GMT  |  John Kicklighter and Terri Belkas, Currency Analyst

Durable Goods Orders (FEB) (12:30 GMT; 08:30 EST)	Durable Goods Ex Transport (MAR) (12:30 GMT; 08:30 EST)
Expected:                  3.5%	Expected:                  1.6%
Previous:                  -8.7%	Previous:                  -4.0%

How Will The Markets React?

 

After a disappointingly timid reaction to the Conference Board’s cooler-than-expected consumer confidence survey Tuesday morning, volatility traders in the US markets turned their attention to the economic anchor of the week – durable goods orders. Economists expect bookings for products with a life of three or more years rose 3.5 percent in February. For the less volatile measurement, excluding orders for transport related goods, the outlook is just as promising with a 1.6 percent consensus. Many analysts expect February’s report will offer a natural rebound from January’s poor showing. In the opening month of the year, headline orders dropped 8.7 percent while the core number slipped 4.0 percent, the biggest contractions since July 2000 and June 2002 respectively. However, beyond the rebound argument, the related data offers little guidance for a consistent move either way. Supporting the official outlook are the national industrial production and Empire Manufacturing activity reports for February. Production across the US surged 1.0 percent, the most in 15 months. On the other hand, both indicators have their caveats. The Empire improvement was isolated to the New York area and the factory gauge was heavily influenced by a jump in utilities that followed a turn in the weather. Contradicting expectations of an improvement in durable orders, retail sales in February rose a meager 0.1 percent while the Philly and Chicago Fed released disappointing manufacturing numbers of their own. Perhaps most telling though was the nationwide ISM report. According to the component data, new orders throughout the US hit their lowest levels in six months. However the data hits the wires, the market will have its unofficial forecasts. Specifically, the deterioration in housing data has already left bulls with a bad taste in their mouths. If the data comes in line or prints only modest changes, traders may simply overlook the report for the more timely ISM gauge on Monday.

 

Bonds –10-Year US Treasury Note Futures

 

Ten-year Treasury futures continue to carve out their 108-06 to 109-10 range. So far this week’s, the disappointing showing in Monday’s new home sales and Tuesday’s consumer confidence survey have roused modest volatility, but almost no clear signal as to a direction. However, heading into the durable goods report, it is interesting to note that the T-Note contract is hovering rather close to 108-06 support. Should a surge in orders surprise the markets and drive equities and the US dollar, the action may leak into treasuries. On the other hand, any jump in bookings would need to be easily related to speculation over the Fed’s growth or interest rate outlook to have a serious effect on yields. Even in the event of a big jump, if the link isn’t made, treasuries may hold their range.

FX – USD/JPY

 

The US dollar has slowly gained against the Japanese Yen as the carry trade becomes en vogue again, but the USDJPY pair appears primed for a breakout as price continues to work towards the apex of an ascending triangle. The release of durable goods orders could be the spark to get USDJPY to break above heavy resistance at 118.50 if the indicator meets or jumps above expectations of 3.5 percent. Sentiment on the dollar has been exceptionally blurry lately, as gloom and doom reports on the housing sector flood the news but the Federal Reserve continues to maintain a hawkish bias. Consumption data could be the final piece of the puzzle to either confirm that the US economy has hit a true downturn, or initiate hopes that American consumers are remarkably resilient and will continue to fuel expansion. Thus, if durable goods actually misses expectations or shows an outright contraction, USDJPY may drop through trendline support to test 117.00.

Equities – S&P 500 Index

 

A surprise drop in consumer confidence and a profit warning from the country’s third-biggest homebuilder sent US stocks sharply lower as fears of a major slowdown in the economy were exacerbated. The S&P 500 index closed down 0.6 percent at 1,428.61 led by shares in Lennar, which plunged 2.3 percent to $43.50 after the company warned that it would miss profit forecasts for 2007 and said it was uncomfortable giving any earnings guidance to investors. Meanwhile, the S&P Homebuilders index pared early losses to wrap up the day 1.1 percent lower, nearly 23 per cent below its high for the year. The major fear right now is that the weakness of the housing sector will spread throughout the markets, but the release of US durable goods could send the S&P 500 Index on its trek higher once again. The figure is anticipated to rebound in February after both the headline and ex. Transport releases plunged during the month prior. Should durable goods improve in February, traders may start to believe that consumption has not withered and will survive the US slowdown, subsequently sending shares up towards the recent high of 1,438.89. However, if orders actually decline for the second consecutive month, the shaky markets may respond with a selloff, leaving the S&P 500 to drop towards support at 1,410.00.

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