×

Greece weighs while traders await Fed

Fresh data on housing - one of the brighter spots in the economy - is expected Tuesday, as the Federal Reserve starts a two-day meeting where its first interest rate hike in nine years could be on the table.

Markets Tuesday were more immediately focused on concerns that Greece could default on its debt. U.S. stock futures were lower, and equities markets in Europe fell as rates rose on peripheral sovereign bonds. Treasury yields were lower, along with German bund yields.

While the Fed is not expected to move on interest rates yet, it has cleared the path for a rate hike at its future meetings, and economists now expect it to move away from its zero interest rate policy in September. The Fed meeting is "live," or one where the Fed could take action. The Fed is expected to adjust its economic and interest rate forecasts and possibly tweak its statement, while continuing to emphasize that rate hikes are dependent on economic data.

Some Fed watchers say the Fed's path could be derailed if financial conditions deteriorate due to Greece, or some other geopolitical event. Greece's troubled debt discussions weighed on markets Monday, and the S&P 500 declined 9 to 2084. Treasury yields were lower, with the 10-year at 2.35 percent in late trading.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

Housing starts are expected at 1.08 million, following April's 20 percent jump to 1.14 million. Also, building permits, reported at 8:30 a.m. ET, are expected at 1.1 million.

"Everybody should be excited about housing," said Michelle Girard, chief U.S. economist at RBS. "Last year, it didn't really come out of the winter doldrums…This year it could and I think psychologically for the Fed that would be an important development. The performance we've seen in a bunch of housing data this spring makes me think housing is going to be better this year."

Read MoreThis would be scary enough to give Fed pause

That's despite rising Treasury yields resulting in higher mortgage rates recently. "I think it's going to take more than 25 or 50 basis points. I think they'll need to see levels noticeably higher than what we've seen, or will see, to really snuff out housing activity," Girard said, adding firming home prices and an improved market help bump consumer confidence. "With every passing month, you do get some easing of credit conditions and that's moving in the right direction as well, and that's part of the story too."

Read MoreFed's worst nightmare: The 'ghost of 1937'

The housing starts follow Monday's National Association of Home Builders sentiment survey, which showed confidence rising to its highest level in nine months.

Michael Gapen, chief U.S. economist at Barclays, said he expects 1.06 million starts, a decline of 7 percent. "Housing is okay. It's not excellent. It's somewhere between okay and good…We just think there are some headwinds. Mortgage rates have bounced up a bit, and are likely to move higher over time if the Fed is going to raise rates, and home price appreciation means affordability has declined for first time home buyers."

As for the Fed, economists expect it to wait several months before raising rates, as it watches for consistent improvement in employment data, and signs that the weakness in the first quarter really was temporary.

Read MoreThis would be scary enough to give Fed pause

"Expect the Fed to downgrade its expectations for growth this year, but largely keep intact its 2016 projection at 2.3% to 2.7%," wrote Tony Crescenzi, executive vice president, strategist and portfolio manager at Pimco. The Fed is likely to downgrade its 2015 target due to the weak first quarter, though it may also note in its statement that the economy has improved lately.

Traders will be closely monitoring the comments of Fed Chair Janet Yellen, who speaks after Wednesday's 2 p.m. Fed statement.

Fed watchers are also waiting to see how the Fed moves its "dots" or the points on its chart that represent Fed officials' projections for where they think future interest rates should be.

"The Fed's 'dots' will likely indicate FOMC participants have lowered their policy-rate projections, but they will likely continue to reflect an expectation for 50 basis points in hikes this year and about 100 basis points in 2016. The Fed's longer-term neutral rate may fall to 3.5 percent from 3.75 percent," Crescenzi added.

What to watch

Housing starts and building permits are expected at 8:30 a.m. ET.

Earnings are expected from FactSet before the bell, and Adobe Systems, Bell Evans and La-Z-Boy after the close.