cross markets data reaction

US Dollar, Equities Hold Off On Final Moves For Existing Home Sales Data

Thursday, 22 March 2007 22:34:15 GMT  |  John Kicklighter, Currency Analyst

Existing Home Sales (FEB) (14:00 GMT)	Existing Home Sales (MoM) (FEB) (14:00 GMT)
Expected:               6.35M	Expected:                -1.7%
Previous:                6.46M	Previous:                  3.0%

How Will The Markets React?
From Monday’s NAHB Housing Market Index through Friday’s Existing Home Sales, this entire week has centered on the massive and beleaguered housing sector. Now, heading into the final indicator on the economic calendar, economists are preparing for yet another disappointment. Considering all the related indicators that have hit the wires over past few days, the official consensus for the National Association of Realtor’s existing home sales report has changed little. At the time of this writing, the market’s official consensus called for a 2.5 percent drop in purchases of previously owned homes to an annual pace of 6.3 million units. If this contraction is realized, it would be the biggest drop in seven months and put a serious crimp in the outlook from the Federal Reserve and optimistic analysts who have reported tentative signs of a bottom. Therefore, the indicator would merely have to come in line to potentially set off another bearish wave for yields, the dollar and equities. On the other hand, even if the sales number prints somewhat better than expected, it still may not generate sufficient optimism to overcome the built up sentiment from the past week’s worth of data. Of the five indicators that have ran across the ticker, three are indisputably unfavorable for the housing market. What’s more, the three are considered leading indicators in comparison to lagging sales and construction activity numbers. The NAHB index, which reports homebuilder sentiment, printed a worse than expected 36 for March. Tuesday’s building permits – a gauge of future building activity – plunged to its second lowest level in years in February. And, most recently, the weekly MBA mortgage applications number slipped 2.7 percent last week as home owners feared the possible repercussions from the sub-prime panic. Everything considered, bulls are on shaky ground.

Bonds –10-Year Treasury Note Futures
Despite a number of events and indicators over the past few weeks that have sent the dollar and benchmark equity indices on wild moves, Treasuries have comfortably forged rather modest ranges. Since late February, when a 9.8 percent drop in Chinese stocks triggered a broad flight from risk throughout the global investment community, the nearby Treasury note futures contract has fluctuated between 109-11 and 108-07. In fact, when the dollar plunged and S&P 500 index surged Wednesday when the Fed softened its tough inflation stance, prices couldn’t even overcome the 109 level. Looking ahead to tomorrow’s existing home sales report, it may take a considerable surprise to rouse the volatility needed to break a range boundary.

 

FX – USD/JPY
The US dollar has been on a roll for the past few days against the Japanese Yen as carry trade differentials still benefit the greenback and economic data out of Japan has not been entirely encouraging. The fundamental picture of the US hasn’t been entirely rosy either, however, as leading indicators for the month of February dropped more than expected to -0.5 percent. USDJPY has now approached a critical junction as the pair is quickly nearing the apex of a symmetrical triangle, leaving price primed for a breakout. The release of US existing home sales on Friday could be the perfect spark to get price action going. The figure is estimated to drop 1.7 percent after jumping 3.0 percent during the month prior, which would drive the already dour sentiment on the housing sector even lower. Should existing home sales post at or below expectations, the greenback will likely feel the repercussion quickly and send the USDJPY pair towards the supporting trendline near 117.00. On the other hand, a surprise gain in the indicator would add to speculation that the housing sector has bottomed out and underpin another round of US dollar appreciation.

 

Equities – S&P 500 Index
After three solid days of gains, US equities slowed to halt as leading economic indicators plunged more than expected at a rate of -0.5 percent. After edging in and out of positive territory throughout the day, the S&P 500 Index ended the trading session down .03 percent to 14,334.56. Technology stocks plummeted with Motorala leading the pack after the company issued a profits warning and said it was changing its management team and planned to return more cash to shareholders, partly in response to pressure from activist investor Carl Icahn. Shares of the firm slid 6.6 percent to $17.50 while shares in Palm, the mobile phone and computer company that Motorala had been expected to bid on, fell 8.8 percent to $17.74.

Meanwhile, the housing sector continued to falter with shares in KB Home down 1.1 percent to $47.25 after the homebuilder reported sharp declines in profits and sales. The fallout could continue on Friday as existing home sales are widely expected to drop 1.7 percent during the month of February. Further weakness would only exacerbate fears that the failures of subprime lenders and a broad housing meltdown will bring the US economy to its knees. However, a surprise improvement in the indicator will leave traders ecstatic and likely drive the S&P towards its recent highs of 1,461.57.

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