After rising for three consecutive months in April, orders for durable goods are anticipated to plunge -1.0 percent during the month of May. The decline… … is likely to be led by goods such as aircraft as the durable goods excluding transportation figure is predicted to edge mildly higher after surging in April.

However, the key factor the markets will hone in
on is capital spending, as business investment remains one of the last
legs that US economic expansion has to stand on the other being
consumer spending. Capital spending could suffer as a result of lagging
profit margins and softer growth outlooks, which would leave businesses
little reason to invest heavily. A drop off in capital spending could
also point to potential weakness in labor demand, as firms would not
need a larger workforce to boost output. While all of this remains
crucial to the US economy and thus, US asset classes across the board,
markets are likely to acknowledge the release on Wednesday but may not
take substantial action ahead of the FOMC rate decision on Thursday. As
a result, the tight ranges weve witnessed in bond and FX price action
may only continue, even if durable goods orders hit the tape at a
surprising figure.

Bonds – 10-Year Treasury Note Futures

Aside from bullish daily oscillators, the failure of 10-year Treasuries
to rise above Fibonacci resistance at 105-15 has been followed by
further signs of a turn, including bearish divergence on hourly
oscillators along with the bearish close on the day. The release of
durable goods orders may help establish where Treasuries will go next,
as a surprisingly weak figure could help propel prices above resistance
as a result of plunging yields. However, it is more likely that
Treasuries will continue to hold below 105-15 as bond traders will be
hesitant to get into the market ahead of this weeks marquee event: the
FOMC decision on Thursday.

FX – EUR/USD

On a longer-term scale, the EUR/USD uptrend remains intact with a
supporting trendline formed from the February 2006 lows still holding.
However, a cluster of Fibonacci support at 1.3475 -1.3500 may limit any
additional gains for the pair, especially as a descending resistance
trendline makes its presence known as well. While technical analysis
looks towards a EUR/USD retrace down to 1.3300, fundamental data may not
work in favor of such a move immediately, as durable goods orders are
anticipated to fall -1.0 percent during the month of May and could also
signal a slowdown in capital spending. The data will come after a spate
of gloomy housing sector reports, which has led to speculation that
consumer spending which, along with capital spending, remains one of
the last drivers of US growth will be the next to falter. With the
housing sector showing no signs of bottoming out, and consumers and
businesses alike anticipated to cut back expenditures boding
increasingly ill for economic expansion throughout the year there is
little reason for the US dollar to resume its rally. However, even
bigger event risk looms on the horizon on Thursday, as the FOMC will
announce their rate decision, though the markets will immediately focus
on the concurrent policy statement for the Feds view on inflation and
growth. Given the importance of the central banks meeting, EUR/USD is
far more likely to trade within a its very tight range over the next few
days as market participants will be hesitant to enter definitive
positions.

Equities – S&P 500 Index

Most US stocks fell for the fourth time in five days, dragged down by
drillers and homebuilders on a drop in oil and amidst signs the housing
slump will persist. Crude oil for August delivery retreated 2 percent to
$67.77/bbl in New York on forecasts that US oil and fuel inventories
will prove to have risen upon release on Wednesday, sending Exxon Mobil,
the world's biggest oil company, down 55 cents to $81.82 and
ConocoPhillips, the third largest US oil producer, down $2.24 to $75.80.
The shares were also hurt after Venezuela's energy minister said Exxon
and ConocoPhillips will end oil and natural-gas projects with the
country after talks with President Hugo Chavez's government failed.
Meanwhile, lackluster new home sales helped push homebuilder Lennar down
$1.20 to $37.55 – its lowest since September 2003 – especially after the
company reported a loss for the fiscal second quarter.

Trading of US shares could remain lackluster on Wednesday as durable
goods orders for the month of May are anticipated to fall back. The data
would only signal that a marked slowdown continues to plague the US
economy, which the Federal Reserve predicts will recover later in the
year. However, with the S&P 500 holding within a range of 1,490 1,540,
Wednesdays economic data may not be able to provide enough fuel to
shake the equity index free, especially as traders anxiously await
Thursdays FOMC decision.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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