Week ahead: Will rising rates outweigh job market strength and sink new home sales?

Will new home sales bounce back in May after a dip in April? New data out Monday will show whether a strong economy and plentiful jobs were enough to offset the headwind of higher mortgage rates and spur home buyers to snap up their new dream home. 

Housing is a key driver of the U.S. economy, as a healthy number of purchases of homes shows consumers' upbeat confidence in the future and also spurs spending on home-related goods like furniture, rugs and accessories.

Wall Street is forecasting a 1% increase in new home sales in May compared to April. Analysts are looking for sales to tick up to 669,000 units on an annualized basis, up from 662,000 in April. Newly built home sales have been recovering steadily, driven by strong consumer demand. But rising mortgage rates "remain a concern," Nomura economist Lewis Alexander noted in a report. 

The rising rate environment is both spurring sales and holding them back, Alexander said.

"The prospect of rising rates could compel consumers on the fence to participate in the market to avoid higher mortgage rates later, but recent rate increases have made it more difficult for first-time buyers to enter the market," Alexander said.

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One silver lining is the shortage of existing homes for sales and worsening home affordability could spur more consumers to consider buying newly built homes, he adds.

Starting Tuesday, Wall Street will also be getting fresh data on how U.S. consumers — whose purchases account for roughly two-thirds of the nation's economy — are feeling. Nomura sees the Conference Board's consumer confidence index rising from 128 in May to 130 in June, a level that keeps confidence at a 18-year high. Positive drivers of consumer confidence include an unemployment rate below 4% and steady job growth, Alexander says.

On Friday, the University of Michigan will release its final consumer sentiment survey findings for June, and it is expected to come in close to its preliminary reading of 99.3 back on June 15. Still, Alexander says he will be looking for any signs, "or additional color on the impact of increased trade tensions" on consumer sentiment.

Investors and economists this coming week will also be watching for fresh developments in the trade war between the U.S. and China.