May Housing Starts Weigh on Stocks

Morning Greek

Data Impact: -1

(Scale: -5 to +5)

The day's trade should be most impacted by May's horrible Housing Starts data and the potential for uprising in Spain. Lucky for the Spanish government, Spain has its first World Cup match today (very likely played a role in the government's scheduling). We also review the Mortgage Activity Report, Industrial Production and the PPI within today's report.

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May Housing Starts Weigh on Stocks

Prepare yourself for a busy day, especially given a tough Housing Starts report. We have four pre-market economic reports to review in total. Mortgage activity came in strong last week, but recall our insight regarding the inadequate adjustment for the Memorial Day holiday in the last report. Industrial Production improved, and lower gasoline prices led the Headline PPI lower.

Housing Starts May - Impact: -3

In our weekly copy, we warned that Housing Starts should prove critical when reported for May. Well, the data was lousy, so tread carefully today. We said "May's data should expose the impact of the expiration of tax credits in April."

Housing Starts sank 10% to an annual pace of 593K, down from April's revised pace of 659K. Single-family starts collapsed even further, dropping 17.2% to a rate of 468K. Some will argue that starts were pulled into March and April from May and June due to the tax credit, but that only places the real annual pace somewhere in between, which is not a satisfactory pace of activity either. Rather, we think you need to digest the fact that there will be no robust economic recovery given anchored unemployment and the burdens this economy carries from the worst financial disintegration since the Depression. Economists were somehow surprised by this data (tell me how they could be considering they get paid for forecasting), as the consensus had forecast a pace of 650,000 (that's a big miss).

Building Permits also depressed us, as the annual pace fell to 574K in May, down from April's 610K. Housing completions fell to 687K, down from 742K in April. Regionally speaking, the trouble was worst in the South (-21.3%) and Northeast (-6.3%); Starts in the West gained by 10.8% and in the Midwest by 4.9%. However, before you Midwesterners get too excited, note that your permitting activity was the worst of all in May.

Mortgage Activity Report - Impact: +1

Acting to temper the impact of the Housing Starts data, the latest Mortgage Activity Report from the Mortgage Bankers Association showed the first growth in over a month. However, recall our insight from last week, within which we exposed a very clear miscalculation of the impact of the Memorial Day holiday. We said the drastic change clearly showed the adjustment for the holiday was inadequate, and so this week's improvement should not temper concerns raised by the Housing Starts data. Instead, look ahead to next week to try to get a handle on real activity.

For the week ended June 11, the Market Composite Index of mortgage volume recovered 17.7%. Refinancing activity certainly played a role, as the Refinance Index jumped 21.1%. Contracted fixed rates on 30-year and 15-year mortgages averaged 4.82% (from 4.81%) and 4.23% (from 4.26%), respectively. Purchase Activity gained as well last week, as the Purchase Index improved 7.3%. The only reason we attribute a positive impact factor to this data point is because we do not expect most market participants to fully understand the Memorial Day adjustment impact (lowered the prior week significantly).

Producer Price Index - Impact: +1

The Producer Price Index for the month of May was reported at 8:30. As expected, lower energy prices pulled down the Headline PPI figure in May. The Producer Price Index slipped -0.3% in May, versus expectations for a -0.5% drop, as the Energy Index fell 1.5% and Food Index slipped -0.6%. When excluding volatile food and energy prices, the Core PPI gained by 0.2%, versus economists expectations for a 0.1% increase. Gasoline prices drove the energy decline, as gas prices fell 7.0% in May. Within the Food Index, prices for fresh and dried vegetables dropped 18%. With prices generally tame, and with headline prices lower for consumers' benefit, the net impact of this report is positive.

Industrial Production & Capacity Utilization
Market Impact: +1

Industrial Production and Capacity Utilization were reported at 9:15 AM. May's data showed a continuation of improving trend. Production gained by 1.2%, more than economists expected (+1.0%) after rising 0.7% in April (revised). Capacity Utilization improved to 74.7%, again better than forecast (74.5%); May was also better than April's 73.7%.

DC Drivers
Market Impact: -1

Last night's Oval Office address by President Obama was generally considered weak, and is driving great criticism of the President today across parties. In DC happenings, at 5:45 PM, Fed Chairman Bernanke addresses the Conference on the Squam Lake Report, discussing "Fixing the Financial System". Philadelphia Federal Reserve Bank President Charles Plosser participates in a panel discussion at an academic forum in New York on fixing the financial system. A Senate panel examines the financial impact of the Gulf oil spill. BP's (NYSE: BP) Chairman has been invited to the White House. The SEC is voting on proposed changes to disclosure rules for target-date funds.

EIA Petroleum Status

The EIA's Petroleum Status Report is due for release at its usual 10:30 reporting time.

Corporate News Drivers

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are being delisted from the New York Stock Exchange. These are two of the most familiar ticker symbols on the exchange, but you'll find your shares elsewhere and trading with some new symbol soon. The companies have failed to meet exchange requirements for too long, and have been asked to leave the party.

Look for Oasis Petroleum to price 42 million shares at between $13 to $15 each. Electronic Arts (Nasdaq: ERTS) hosts an analysts meeting, while Sunoco (NYSE: SUN), Toronto Dominion (NYSE: TD) and ArcelorMittal address investors. Norfolk Southern (NYSE: NSC) is presenting at a Bank of America/Merrill Lynch conference. Procter & Gamble (NYSE: PG) and Coca-Cola Enterprises (NYSE: CCE) are presenting at the Deutsche Bank (NYSE: DB) Global Consumer & Food Retail Conference. Cardinal Health (NYSE: CAH) and Humana (NYSE: HUM) are presenting at the Goldman Sachs (NYSE: GS) Global Healthcare Conference. W.W. Grainger (NYSE: GWW) and Medco Health Solutions (NYSE: MHS) are presenting at the William Blair Growth Stock Conference.

Look for earnings releases from Cascal NV (NYSE: HOO), Culp Inc. (NYSE: CFI), Dave & Buster's (NYSE: DAB), FedEx (NYSE: FDX), IHS Inc. (NYSE: IHS) and Rand Logistics (Nasdaq: RLOG).

International Drivers

Overseas, markets were closed in China, Hong Kong and Taiwan Wednesday. Spain has an important day ahead of it, with its new labor market reforms being presented.



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