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Wednesday, February 19, 2014

Soft home construction and a tame wholesale inflation reading provide the backdrop for today’s stock market action. Also on tap for release later this afternoon is minutes of the last Fed meeting when they announced sticking to their Taper plans. The minutes aren’t expected to spring any surprises through it will be interesting to see the discussion within the FOMC of recent soft economic data.

This morning’s soft January Housing Starts and Permits reconfirmed the trend that we have been seeing repeatedly in recent days and comes a day after the unusually big pullback in the homebuilder sentiment index. Weather is getting all the blame, prompting investors to overlook the recent weakness and look for improvement as the economy’s deep freeze thaws with the arrival of Spring. Since February has seen no improvement on the weather front, we will need to wait at least through April (for March data) to start seeing some light. As such, investors have given up on GDP growth in the first quarter, with the economy’s growth momentum expected to resume in the second of the year.

The weather explanation makes sense, though the regional breakdown of today’s Housing Starts, particularly in the Northeast, don’t sync-in with that explanation. We saw a somewhat similar disconnect at play in last week’s negative revision to December and November Retail Sales numbers that appear to show less consumer spending momentum in Q4 than earlier believed. Only time will tell what really is going on in the economy, though stock market investors don’t appear overly skeptical of the weather explanation at this stage.

In corporate news, Signet Jewelers (SIG - Snapshot Report) is acquiring fellow jewelry retailer Zale Jewelers (ZLC - Snapshot Report). In deals like these, we typically see the acquirer’s stock come under pressure while the target company’s stock goes up for obvious reasons. But investors appear to be appreciative of the deal, with SIG is expected to open higher. We saw something at work in Tuesday’s big pharma sector deal when Dublin-based Actavis (ACT - Analyst Report) acquired Forest Labs (FRX - Analyst Report).

Sheraz Mian
Director of Research

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