Market Calendar

Housing may be gaining forward momentum but adverse weather appears to have delayed groundbreaking. For the latest month, starts declined while permits strengthened. Housing starts in December slipped back 4.3 percent, following a 3.8 percent rebound in November. The December annualized pace of 0.529 million units fell short of the median forecast for 0.550 million units and is down 8.2 percent on a year-ago basis. The reversal in December was led by a 9.0 percent drop in single-family starts, following a 5.8 percent gain the month before. The multifamily component rebounded 17.9 percent after declining 5.0 percent in November.<br><br>By region, declines were seen in the Midwest, down 38.4; the Northeast, down 24.7; and South, down 2.2 percent. The sharp weakness in the Midwest and Northeast indicates that snow storms played a role in damping starts. For the West, starts jumped 45.8 percent. <br><br>Housing permits, in contrast, made a 16.7 percent comeback in December after declining 1.4 percent in November. Overall permits posted at an annualized rate of 0.635 million units and are down 6.8 percent on a year-ago basis. The latest boost was led by the multifamily component which was up a sharp 53.5 percent while single-family permits improved 5.5 percent.<br><br>The gain in permits may be a significant positive as it in part reflects optimism of homebuilders. December starts were relatively weak and this likely was due to atypically adverse weather for the month. Permits are much less affected by weather as homebuilders simply fill out paperwork indoors while starts depend on whether bulldozers and workers have good weather to operate. However, the Commerce Department noted that building code changes took effect on January 1 in California, Pennsylvania and New York. In turn, some of the multifamily strength likely is due to construction companies getting approval before the tighter regulations.<br><br>Today's report should be seen as a positive despite starts falling short of expectations. The big issue going forward is whether homebuilder optimism is confirmed by gains in home sales. If sales stay flat, starts will ease. But meanwhile, homebuilders have reason to be cautious and the boost in permits should be seen in that context. Optimism is up but more toward multifamily than single-family.<br><br><br>

As expected, the Fed left its fed funds target rate at a range of zero to 0.25 percent. The meeting statement kept most of the language from the prior meeting. The previously announced QE2 stays on track as planned. There were no dissenting votes.<br><br>The Fed continued to focus on weakness in labor markets and soft core inflation as justification for continued loose monetary policy.<br><br>"Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward."<br><br>Again, the Fed sees the need to keep the fed funds rate "exceptionally low" for an "extended period." <br><br>On the issue of inflation, the Fed is downplaying higher commodities prices and is focusing on core inflation without explicitly saying so.<br><br>"Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward."<br><br>Of course, it is core CPI inflation that has been trending downward.<br><br>The second round of quantitative easing continues as previously announced. The Fed is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.<br><br>Part of the reason that there was no dissenting vote this time is because a new panel of Fed District presidents rotating into voting status and Kansas City Fed President Thomas Hoenig rotated out of a voting position.<br><br>Basically, monetary policy is on a holding pattern until QE2 is fully implemented by the end of June of this year. Thereafter, some of the new voting members may start to emphasize the planning of unwinding Fed balance sheet expansion.<br><br>On the release of the statement, equities firmed modestly initially but then eased marginally.<br>

Durables orders are living up to their reputation as one of the most volatile monthly series in the U.S.-and the latest report was disappointing. Durables orders in December unexpectedly dropped 2.5 percent, following a revised 0.1 percent fall the month before. Weakness was primarily in nondefense aircraft orders. Excluding transportation, new orders for durable goods were more favorable, advancing 0.5 percent after a 4.5 percent surge in November. By industry, strength was mostly in machinery with others industries generally down but after healthy gains the prior month.<br><br>By major industries, transportation fell a monthly 12.8 percent in December after declining 13.1 percent the month before. The latest decline was mainly in nondefense aircraft which plunged a monthly 99.5 percent-again, essentially Boeing orders likely falling due to delays in its Dreamliner delivery dates. Also, within transportation, motor vehicles actually increased 1.7 percent while defense aircraft & parts fell back 10.9 percent.<br><br>Outside of transportation, strength was narrowly focused with machinery jumping 10.6 percent, after rising 0.3 percent in November. Other industries were down but generally after a notable gain the month before. Primary metals fell 4.7 percent-November in parenthesis (up 13.8 percent); fabricated metals down 1.0 percent (up 2.9 percent); computers & electronics down 1.2 percent (up 6.5 percent); electrical equipment down 0.1 percent (up 8.6 percent); and all others down 1.1 percent (up 0.8) percent.<br><br>Business investment in equipment continues to show strength outside of aircraft. Nondefense capital goods orders excluding aircraft in December rose 1.4 percent after gaining 3.1 percent the prior month. Shipments for this series rose 1.7 percent, following a 1.4 percent increase in November.<br><br>Overall, the report should be considered in light of ex-transportation showing the overall trend over two or three months. Essentially, manufacturing is still on an uptrend though one not as robust as believed last month.<br>

The economy regained momentum in the final quarter of 2010-and in most of the right places. Fourth quarter GDP accelerated to a moderately healthy 3.2 percent annualized gain, following a 2.6 percent increase the prior quarter. The latest figure fell short of analysts' median forecast for a 3.5 percent boost. But the detail is stronger than the headline number.<br><br>The last quarter of 2010 was led by sharp improvement in net exports to a gap of $392.2 billion from $505.0 billion in the third quarter. Exports rose an annualized 8.5 percent while imports dropped 13.6 percent. Also boosting GDP were personal consumption expenditures, up an annualized 4.4 percent; business investment in equipment & software, up 5.8 percent; and residential investment, up 3.4 percent. Nonresidential structures posted a modest rise.<br><br>Weakness was led by a sharp slowing in inventory investment to $7.2 billion from $121.4 billion in the third quarter. Government purchases slipped 0.6 percent.<br><br>The bottom line is that final sales have picked up significantly. Final sales of domestic product strengthened to a 7.1 percent increase from 0.9 percent annualized in the third quarter. Growth in real final sales to domestic purchasers (takes out net exports) picked up to 3.4 percent, following a 2.6 percent boost in the third quarter. <br><br>Year-on-year, real GDP in the fourth quarter is up 2.8 percent, compared 3.2 percent in the third quarter.<br><br>Economy-wide inflation as measured by the GDP price index softened to 0.3 percent in the fourth quarter, following a 2.1 percent increase the prior quarter. The consensus expected a 1.5 percent gain. <br><br>Today's report is clearly positive for forward momentum in the recovery despite a slightly disappointing headline number. Demand is picking up and inventories are not out of control-a very good combination. Still, growth is moderate and there are no signs of pending excessive growth.<br>