The February new-home sales and durable goods reports will come out Friday, the last batch of key economic data to be released ahead of next week's Federal Reserve policy meeting.

These reports are likely to be market movers, one way or another. Hopes have been running high that the Fed will stop after one final hike next week -- hopes that were dashed Thursday by a stronger-than-expected report on existing-home sales, which (along with a spike in crude prices) put downward pressure on Treasuries and stock proxies.

The market has been playing a game of cat and mouse with interest rate expectations in recent weeks. Worries that the Fed might hike two or three more times, perhaps slowing economic and profit growth to an unhealthy degree, have set the stage for relief rallies whenever the data has come in on the softer side, as was the case last week.

This week, however, these hopes have been contradicted several times. Monday night, a speech by Fed Chairman Ben Bernanke at best failed to confirm the hopes of the "one and done" crowd. On Tuesday, stronger-than-expected core producer prices even revived concerns that maybe the Fed will still hike three more times.

Again on Thursday, the economic data tipped the balance of expectations in favor of more rate hikes. Contrary to economists' expectations of further evidence of weakening in the housing market, the National Association of Realtors said existing-home sales rose by 5.2% in February.

In addition, KB Home ( KBH) said first-quarter earnings rose 42% from a year ago to $174.5 million, or $2.02 a share, beating estimates by 6 cents a share. KB shares rose 5% although the homebuilder also said new orders had fallen 12% from a year ago.

After the data, the market is now pricing in 100% odds that the Fed will hike the fed funds rate to 4.75% next week, and 94% that it will hike to 5% in May. Odds of another hike to 5.25% stand at 6% for the Fed's June meeting and at 25% for the August meeting, according to Miller Tabak.

Regardless of economists' post-data diagnosis that warm January weather likely gave a one-time boost to sales in an otherwise declining housing market, bonds and stocks dipped. Stocks were also pressured by the price of crude, which rose $2.14 to $63.91, amid supply concerns in Nigeria and Iran.

The Dow Jones Industrial Average dropped 47.14 points, or 0.4%, to 11,270. General Motors ( GM) also fell after announcing it sold a majority stake in the its commercial real-estate finance unit to a consortium of private equity buyers.

The S&P 500 dropped 0.3% to 1301 and the Nasdaq Composite lost 0.14% to 2300. Adobe ( ADBE) fell 0.8% after posting a 31% drop in first-quarter earnings -- although its results topped estimates -- on Wednesday after the close. It also issued an earnings forecast that was at the low end of market expectations.

Dell ( DELL) also dropped after announcing the purchase of Alienware, a high-end PC maker whose machines are a favorite of game players. The price of the transaction wasn't disclosed. But Yahoo! ( YHOO) bucked the trend, rising 3.5% after UBS upgraded the stock.

The benchmark 10-year Treasury bond market fell 8/32 in price while its yield, which moves inversely, rose to 4.73%.

Also hitting bonds were comments from Senator Charles Schumer (D., N.Y.), who is in China this week along with Sens. Lindsey Graham (R., S.C.) and Tom Coburn (R., Okla.) to pressure Beijing into letting the yuan appreciate more vs. the dollar. Many in Congress are blaming China for keeping the yuan artificially low to boost its exports at the expense of U.S. production.

After two days in China, Schumer said he is "more optimistic" about a yuan revaluation, according to Bloomberg. He also predicted the yuan might rise beyond a rate of 8 per dollar, roughly its current level, as early as next week. But Schumer said he didn't have any "inside knowledge" about what the People's Bank of China may do.

Still, the comments were viewed as negative for Treasuries, because any revaluation of the yuan means China needs fewer dollars to keep the yuan low. And China has been recycling a big chunk of its dollars into U.S. Treasuries.

The dollar, meanwhile, stayed firm thanks to the stronger-than-expected housing data and expectations of more Fed rate hikes, which still provide support to the greenback.

Down to Brass Tacks

Indeed, for stocks, bonds and the dollar, next week's Fed meeting is going to be a decisive time.

"Everything is hanging on whether next week's expected move will be the last rate hike," says Chris Johnson, market strategist at Schaeffer's Investment Research.

"It's kind of like placing bets for the winning team of the Super Bowl," he says. "The closer you get to it, the narrower the field, and every bit of news about the teams causes the wildest swings and makes the bets very volatile."

Adding problems for stocks, says Johnson, is that the Dow and S&P are near five-year highs, which means that players are looking for a good reason to sell. With more and more evidence piling in that the Fed will go beyond next week's hike, the Fed meeting could provide the perfect excuse to cash in profits, he says. The Fed usually provides hints about future rate moves in the comments accompanying its policy actions.

In this context, Friday's data take on added significance. On the one hand, orders of durable goods are expected to have increased 1.3% in February after dipping 9.9% in January. New-home sales are expected to have fallen to 1.210 million in February from 1.233 million the previous month.

The housing data are what the bond market will be fixating on, "with many expecting the housing market to weaken the economy enough to justify an end to the Fed's rate hikes," according to Tony Crescenzi, interest rate strategist at Miller Tabak and a contributor.

If the existing-home sales data are any indication, warm January weather will have boosted new-home sales beyond economists' expectations.

The bond and stock markets may not like this, but Thursday's dip may remove some of the sting from Friday's data. Increasingly, it seems the official time to be disappointed for the "one and done" crowd will be next week's Fed meeting.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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