Housing and monetary policy. Those are the themes dominating an otherwise light data docket this week. But investor focus could be more attuned to the problems in Europe rather than the domestic situation.

Ahead of Monday's opening bell, the Treasury curve is flattening and equities are tumbling with the Dow already down by triple-digit figures.

Renewed Greek concerns are the driving theme. Some new agreements were reached last week and Greece was pressed to adhere to fiscal targets, BMO Capital Markets said. 

"Greek officials left the meeting acknowledging that they needed to do much more and could start slashing public payrolls immediately. IMF, EU and ECB officials will continue examining Greece's books this week to see if it qualifies for the next bailout tranche."

European markets are down some 2% (including a 2.50% drop in the CAC-40). In Asia, China's main index fell 2% to its lowest since July 2010.

The benchmark 10-year Treasury yield is five basis points firmer than Friday's close at 2.01%, while the 30-year yield is six basis points firmer at 3.26%. The two-year yield is steady at 0.17%.

S&P 500 futures are 16.9 points lower at 1,194.90 and Dow futures are 142 points lower at 11,304. 

Light crude oil is 0.97% lower at $87.11 per barrel, and gold prices are up 0.47% at $1,823.

Key Events This Week:

Monday:

10:00 - The Housing Market Index, a monthly measure of homebuilder sentiment, is expected to remain at just 15 in September. Forecasts range from 13 to 16, but with the break-even point being 50, these differences are minor in the larger story. 

Economists at Nomura Global Economics predict a score of of 16, which they note would be double the all-time low of 8 seen in January 2009.

10:30 - President Obama presents his long-term deficit-reduction plan.

"According to press reports," BMO said this morning, "it aims for $3 trillion in cuts, with half from higher taxes and the rest split between Medicare savings, ending of the Iraq and Afghanistan wars, and interest savings. As we've already heard, any type of tax increase won't go over well with Republicans. Absent some way to pay for Obama's plan that doesn't involve higher taxes, it's going to be tough get something meaningful done."

• Treasury Auctions:
• 11:30 - 3-Month Bills
• 11:30 - 6-Month Bills

Tuesday:

8:30 - Housing Starts are anticipated to stumble in August. The annual pace of new homes being constructed fell 1.5% to 604k in July, and now economists expect the rate to drop 1.8% to 590k. Building permits, which anticipate starts, were last at 601k and are now forecast to fall to 590k.

"The single-family market shows no signs of life," said IHS Global Insight. "We are expecting a marginal improvement in housing starts in August with the gains expected to come from the volatile multi-family segment. This segment, which makes up about one-third of the housing market, is slowly coming back to life."

Citigroup takes the opposite position.

"We expect another decline in housing starts in August, this time reflecting a pullback in multifamily starts," they wrote. "The jumps in multifamily starts in June and July seemed to have gone further than implied by fundamentals, and therefore we look for a partial reversal.

• Treasury Auctions:
• 11:30 - 4-Week Bills
• 11:30 - 52-Week Bills

Wednesday:

10:00 - July's 3.5% decline in Existing Home Sales is expected to reverse in August. The consensus expects to see a 3.5% advance to 4.80 million units, with forecasts ranging from 4.50 to 4.92 million. Optimistic predictions are largely based on the pending home sale index, which looks at contracts that have been signed but not finalized; lately, however, pending sales haven't translated into actual sales at the usual pace, causing some uncertainty for this index.

"Through the first seven months of 2011, pending and existing home sales have diverged by an average of 2.8%, suggesting that increases in pending sales simply aren't translating into the closed purchase contracts measured by the existing sales series," said Janney Capital Markets. "That divergence, driven by appraisal and mortgage credit problems, reduces the usefulness of the most efficient predictor of housing activity, pending sales, from consideration in estimating existing figures."

Underlying trends, Janney suggested, are troubling at best given high inventories and low demand.

"We see the supply/demand imbalance remaining even after the foreclosure-driven forced selling begins to slow, meaning weak housing markets into 2013 at this point," Janney said. "On the positive side, the Fed's Operation Twist proposal, which we believe will see the light of day, would have the effect of lowering mortgage rates, thereby increasing housing affordability."

IHS Global Insight points out that the Mortgage Bankers Association's purchase index fell for the fifth straight month in August when it plunged 11.9%. 

"Demand to buy homes is falling, even as mortgage rates have dropped to record lows," IHS noted as they forecast a 1.3% decline to a 4.61-million-unit annual rate.

Fannie Mae'd 30 year mortgage rate averaged 3.79% in August, meaning the average property is about 8% more affordable versus year-end 2010, according to Janney. 

"That affordability," they concluded, "just doesn't seem to be enough, however."

2:15 - The surprise in August 9's FOMC Statement was the adoption of a specific timeline for keeping rates low (the Fed said rates would remain "exceptionally low" until "mid-2013). The question this time is whether the Fed will enact further measures of monetary accommodation.

"Three main options appear to be on the table," said IHS Global Insight, listing "Operating Twist," cutting interest rates on bank reserves at the Fed, or another round of quantitative easing.

"The one most likely to be adopted on Wednesday is the 'twist', because it's the least likely to meet resistance from the more hawkish voices at the Fed," IHS said. "The idea of the twist is to put downward pressure on long-term interest rates, although it is unlikely to have a big effect, especially since the markets have seen it coming. We believe that more quantitative easing is too controversial for now, especially since the hawks will have taken note that core CPI inflation has now reached 2.0%, but that it will come eventually because we expect growth to remain weak and the unemployment rate to rise."

Deutsche Bank explains the twist like this: "This would entail either passive reinvestment or active rotation into longer-maturity Treasury securities with the intention of flattening the yield curve. This allows policymakers to reduce longer-term interest rates without further expanding the Fed's portfolio. As a result, policymakers can deflect claims of 'money printing' through balance sheet expansion. We are somewhat skeptical of the magnitude of benefit from such actions, since longer-term interest rates are already extremely low."

Thursday:

8:30 - Economists hope the jump in Initial Jobless Claims last week was an aberration. Weekly claims jumped 11k to 428k in the period ending September 10, brining the four-week average to 419,500. Given the statistical noise stemming from Labor Day, the report could be discounted. The median estimate expects claims to now fall 9k to 420k.

"Claims have been grinding higher in recent weeks, although at 428k they are well below the 450k-475k level that would be consistent with recession," said Deustche Bank. "This week's claims figures correspond to the September employment survey week, so they take on added significance."

Citigroup isn't so optimistic, believing claims are will probably remains elevated and push the four-week average to a two-month high.

"While the Labor Department stated that there were no reported Irene-related filings recently, we still posit that the storm may be having some influence," Citi said. "Nonetheless, the worsening claims count is not inconsistent with the deterioration in business sentiment and lackluster economic data of late."

10:00 - The final bit of data hitting the newswires this week is Leading Economic Indicators, a composite gauge designed to track turning points in the economy. In July, the index posted an increase 0.7%; in August, the median estimate is a meagre uptick of 0.1%, with estimates varying from -0.5% to +0.5%.

"The largest drags should come from a drop in the S&P 500 and falling consumer expectations," said Nomura Global Economics, anticipating a 0.3% downfall. "The largest contributors should once again be the interest rate spread and the real money supply (M2), both indicators of the Fed's extraordinary support for the economy."

Citigroup looks for a 0.3% gain, but acknowledges recent gains have reflected huge contributions from rapid real money supply growth and a steep yield curve, and neither signal better economic growth. 

"In the case of money supply, the rise has been driven by a rule change rather than economic forces," Citi said. "Nonetheless, these components more than offset the plunge in stock prices and deterioration in consumer sentiment as the euro area sovereign debt crisis and U.S. political risks intensified. Labor market indicators and business activity gauges were also lackluster in the month."

Friday:

No Economic Data.