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Wednesday, February 20, 2013

This morning’s tame wholesale inflation and Housing Starts readings could potentially come in the way of the market’s march towards new all-time highs in today’s session.

Minutes of the Fed’s January meeting coming out later today could potentially be another source of concern for the market if it shows that the FOMC continued its discussions of how to ease the $85 billion purchases of bonds. The market got surprised in early January when it found that the FOMC had discussed the issue in the December meeting, but the issue may not carry as much sting any more.

The January Housing Starts data show a pause following the very strong gains in December. Starts came in weaker than expected at the seasonally adjusted annual rate of 890K in January versus expectations of a 920K reading and December’s 973K level (revised upwards down from the originally reported 954K level).

The January Starts level is up 24% from the same period last year, but remain significantly below the bubble peak of 2.3 million in 2006. Building Permits, a leading indicator of future construction activity, increased 1.8% in January 925K, the strongest pace since June 2008.

Gains in the homebuilder sentiment index, a leading indicator of home construction, in recent months confirms the positive momentum on the home construction front that we have been hearing from homebuilders like Toll Brothers (TOL - Analyst Report), which reported today, Lennar (LEN - Analyst Report), Pulte Homes (PHM - Analyst Report) and others. While the February homebuilder sentiment index released Tuesday weakened a bit from the month before, its 2012 gain has been one of the highest on record.??????

Based on the historical correlation between the homebuilder sentiment index and housing starts, some analysts estimate that the index’s current level is consistent with housing starts that are in the 1.5 million vicinity. This would mean that housing starts could continue to improve even if the index doesn’t show much improvement in the coming days.

Bottom line, housing could potentially be a bigger contributor to GDP growth this year than has been the case in recent quarters, offsetting slack from the external sector.??????

Sheraz Mian???

Director of Research

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