Tuesday, June 19, 2012
The Fed remains the center of attention today as investors expect
the central bank to come through with more support at the
conclusion of its two-day meeting tomorrow. Many investors doubt
the relevance of more monetary stimulus to the recent loss of
momentum in the economy. But the expectation is nevertheless
widespread that the central bank needs to do 'something.'
We will have to wait another day to find what the Fed plans to do,
but growing hopes of additional Fed support has been a major prop
behind the market's recent strength, offsetting the negative
developments in Europe. The Fed aside, we have a well subscribed
treasury bills auction in Spain, though they had to pay offer a
higher interest rate compared to a month ago. Yields on benchmark
Spanish bonds remain at levels that limit the government's capital
market access, though they are a tad lower today.
On the domestic data calendar, we have a mixed housing report this
morning, with Housing Starts lower than expected and Permits coming
in better than expected.
The May Housing Starts data came in weaker than expected, down 4.8%
to a seasonally adjusted annual rate of 708K, compared to the 5.4%
gain in April to 744K. The prior month's data was significantly
revised higher to 744K from the originally reported 717K.
The positive revision to April aside, the May reading was still
weaker than expected, though the drop would be a lot less in the
absence of the April revision. Housing Permits came in better than
expected, up 7.9% in May vs. the drop of 6% in April (originally
reported as a drop of 7%).
Housing Starts have been bouncing around the 700K level in recent
months, having bottomed almost two years back at the 478K level.
This is an improvement, but admittedly from a very low base. Keep
in mind that the long-term historical average for Starts is around
double the current level, while Starts at the 'bubbly' peak were
north of the 2.2 million mark.
We will probably never go back to that level, but we do need to
see a sustainable recovery in this key sector of the economy. Sales
and inventories have stabilized, but a pricing recovery will like
take much longer given the shadow inventory of foreclosure pipeline
and the recent loss of momentum in the labor market.
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In corporate news,
) posted modestly better-than-quarterly earnings, but
disappointingly guided lower for the coming quarters.
) posted in-line quarterly results this morning as same-store sales
dropped 6.6% due to the lingering effects of the loss of
) business last year. Importantly, the drug store chain increased
its quarterly dividend by 22% and announced the acquisition of a
45% stake in Alliance Boots for $6.7 billion in cash and stock.
Director of Research