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NOTHING BUT FED - By WSS Research Desk

By Carlos Guillen

Quite encouraging today is that equity markets are making strong gains as demonstrated by the Dow Jones Industrial Average gaining over 120 points. However, it appears the euphoria is mostly based on the expectation that comments from the FOMC will be favorable for stock markets; in other words ... no tapering. There have also been some encouraging economic data points on housing and U.S. consumer prices today, but the focus is still mostly on the Fed.

Supporting the expectations of favorable Fed actions today was that increases in the cost of living appeared to have climbed a bit, but less that predicted in May, with gasoline prices stable. According to the Department of Labor, the Consumer Price Index (CPI-U) in May increased month-over-month by 0.1 percent; this compares with the Street's consensus estimate calling for a 0.2 percent rise. Excluding food and energy contributions to the price index, core CPI increased month-over-month by 0.2 percent, while economists' average forecast called for a 0.1 percent rise. From a longer term perspective core prices increased 1.7 percent over the trailing twelve months, which was a smaller rate than that reached in the year ago period of 2.3 percent, perhaps showing some disinflation action. The fact that inflation is running below expectations for the most part coupled with slowing economic growth so far into the year may actually serve to give the Fed more reasons to maintain its current path of very easy monetary policy, despite talks of bringing the policy to an end. Of course, stock markets do love easy money from the Fed, which is the main reason they have been up over the last couple of trading sessions.

Also According to the U.S. Census Bureau, building permits during May increased year-over-year by 20.8 percent and decreased month-over-month by 3.1 percent to 974,000, landing in line with consensus. Concurrently, housing starts climbed year-over-year by 28.6 percent and rose month-over-month by 6.8 percent to 914,000, coming below the Street's consensus estimate of 950,000; more on this below.

While the data presented today has helped markets move higher, the main driver is still the Fed. The FOMC will be meeting tomorrow and with have a decision on its course of action at 2.00 PM. Until then, there still can be quite a bit of volatility.

Housing Starts Mixed
David Urani

Following up on yesterday's surprisingly good survey of homebuilder confidence, today we got the Census' housing starts data. The report showed 914k annual starts, which was 6.8% higher than the previous month but also below the 950k consensus. Meanwhile permits were down 3% to 974k which was in line with the consensus.

Looking a little bit deeper, one real highlight for us is in single-family permits which increased modestly during the month, to a five-year high. Single family starts were essentially flat. All in all the results were a little bit mixed, with construction activity seeming to level off a bit in recent months, although there's nothing here to indicate the general uptrend is dead.

We have noted that supply of homes on the market has finally managed to start coming back up since the beginning of the year which would be somewhat of a negative indicator for construction but with existing inventory still running at just a 5.2 month supply there is certainly still room for new supply (in fact there are still reported shortages in some areas). But on the other end, part of me also says that we don't want to see builders get too aggressive as they did several years ago so at current levels of production I'm feeling okay.