Equity markets were helped Monday by good earnings reports and analyst buy recommendations which countered news that U.S. foreclosure rates rose more than 30 percent from the previous six-month period and are up more than 55 percent from the first six months of 2006, indicating that the housing recession is the worst in 16 years. Treasuries declined the most in two weeks as a degree of risk aversion came out of the market.
Aside from Friday's NFP Tuesday's readings for the Core PCE Price Index and Personal Consumption could be the most important numbers of the week, as they will provide clues of the Fed's next move and for how well consumers are holding up in the middle of the housing recession.
The psychological implications are very interesting under the present set of circumstances, so let's review two possibilities that would very likely to lead to predictable market reactions.
If the core PCE remains under 2.0 percent and spending grows at a rate faster then consensus, risk will be further accepted. This would likely lead to a very good day for equities and carry trades and a fall in bond prices.
Should the YoY core PCE print over 2.0 while consumption disappoints, the degree of risk aversion would likely rise strongly, meaning that equities and carry trade positions would sell as bonds were bought.
Less certain would be the reaction to a core PCE under 2.0 with disappointing consumption. Under normal circumstances it would indicate the possibility of a fed rate cut, but should the consumer look weak, it might make traders nervous.
If the YoY core PCE prints over 2.0 while consumption number prints higher then consensus, the possibility of a rate cut from the fed would be diminished. However in the current enviorment, the higher rate of consumption just might get traders excited.
Additionally, there are several important earnings reports due tomorrow and those will need to be taken into consideration as well.
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