Fed to Stay in Wait-and-See Mode - Ahead of Wall Street

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Tuesday, March 19, 2013

The Cyprus news is nothing more than a distraction for this market, as attention shifts to Fed's two-day meeting getting underway today. Also significant is this morning's Housing Starts numbers which should help offset the pullback in the homebuilder sentiment index for the second straight month on Monday. Importantly, Housing Permits came in better than expected this morning, confirming the positive housing momentum.

Housing Starts for February matched expectations, while the numbers for January were revised upwards. Starts came in at the seasonally adjusted annual rate of 917K versus expectations of 915K and January's 910K (revised from the originally reported 890K level). Starts have struggled to match the December 2012 level of 973K in the last two months, which has coincided with a loss of momentum in the homebuilder sentiment index as well. Monday's March reading for the homebuilder index fell to 44 from 46 in February and 47 in January, which followed a steady rise last year.

The volatility in Starts notwithstanding, the housing sector remains the brightest spot on the economic landscape helping lift the fortunes of a host of players - from builders like Toll Brothers ( TOL ) and Lennar ( LEN ) to housing related retailers like Home Depot ( HD ) and appliance makers like Whirlpool ( WHR ). The current Starts level represents a significant improvement over the year-earlier level, but still remains below the roughly 1.3 million level considered 'normal' for the U.S. housing sector (Starts were above 2 million during the bubble). February's 917K starts level compares to 2012's 781K and 2011's 609K.

On the FOMC front, no one expects the Fed to announce any changes to its monetary policy stance at this meeting, though we may see some acknowledgement of the improving tone of recent economic data. Today's weaker than expected Starts data notwithstanding, the overall tone of recent economic data has been positive. This has prompted many analysts to raise their GDP growth estimates for the current and coming quarters.

As a result, the QE question has again taken center stage - if the economy is getting better, then why have such massive amounts of Fed stimulus? The QE supporters on the FOMC, led by Bernanke, would be looking for a sustained period of economic growth before changing their stance. Bernanke & Co are well aware of the by now familiar pattern of the U.S. economy to lose momentum in the Spring/Summer months after making encouraging starts in each of the last three years. The issue is particularly significant this year given the onset of fiscal austerity following the tax hikes and budget sequester. My sense is that they would like to see one to two quarters of positive economic data before adjusting their monetary stance.

Sheraz Mian

Director of Research

HOME DEPOT (HD): Free Stock Analysis Report

LENNAR CORP -A (LEN): Free Stock Analysis Report

TOLL BROTHERS (TOL): Free Stock Analysis Report

WHIRLPOOL CORP (WHR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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