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Bottom Line A sea change in market psychology is underway. Even amid the
arrival of repeatedly negative economic data (joblessness up, housing activity
down), yields and equity prices rose sharply last week. Fed speakers, including
erstwhile doves Yellen and Rosengren, seem to be in unison, calling for an
abrupt end to the Fed’s aggressive monetary policy stance.

The futures market
now gives less than full odds of a 25 bps rate rate cut at the end of this
month. Had there been a more robust calendar of data and events this week, the
markets would likely price out the quarter point ease in earnest.

Key indicators this week are few and come later in the week. We believe the
most significant data points will be existing and new home sales (Tuesday and
Thursday, respectively), continuing jobless claims for the April nonfarm payroll
survey week (Thursday) and U of Michigan’s consumer sentiment index (Friday).
FRB Chicago’s Evans (a non-voter on this year’s FOMC) speaks Monday, the
only Fed official scheduled to appear so far. Treasury will auction 3- and 6-
month bills Monday, 4-week bills and 5-year TIPS Tuesday, 2-year notes Wednesday
and 5-year (nominal) notes Thursday.
Existing Home Sales (Mar) We fear February’s 2.9% bounce in existing home
sales was an anomaly and resales will fall 0.4% to a 5.010 mln annual rate in
March. One contributor to our weekly economist survey calls for a 4.2% drop to a
4.820 mln AR, the lowest rate in ten years.

Prompting the February sales improvement was a further 1.9% drop in the
median sales price, last at $195,900 or down 8.2% from a year earlier.
February’s median price of a single-family home ($193,900) wiped out 3.5 years
of price appreciation and the year-ago price change (-8.7%) was the worst
decline in NAR records dating back to 1969.

Look for some moderation in the number of existing single-family homes
available for sale. The time necessary to clear the existing inventory is now
the shortest in six months but needs to fall below five months in order to
signal an upturn in residential investment.

Jobless Claims (Apr 19) IFR expects initial claims for the week ending
April 19 to rise 3k to 375k, pushing the 4-week average from 376k to 377k. The
4-week average was at this level in the start of the 2001 recession. However,
initial claims in prior recessions have typically posted over 380k each week.

Continuing claims filed in the April 5 week rose for a third straight week
to 2.984 mln, their highest level since June 2004. We look for a further rise to
3.0 mln. Next week’s continuing claims data corresponds with the April payroll
survey and a rise to 3.0 mln puts upward pressure on the unemployment rate.

Durable Goods (Mar) After two monthly declines that left orders at their
lowest since February 2007, IFR expects durable goods orders to have bounced by
2.3% in March. Excluding transportation, we have orders rising by 1.9%.

Despite a near doubling of aircraft orders at Boeing in February, the value
of transportation equipment orders rose only 1.8% that month. We think it should
have been more. Accordingly, we believe the 12.3% collapse in general machinery
orders (the largest 1-month decline in four years) will reverse course in March
and push total orders higher by their most in eight months.

One blemish on our rosy forecast is the deepened contraction in the ISM’s
new orders index for March (46.5 versus 49.1). In the bigger picture, we are
concerned with the deteriorating capital expenditure outlook as economic
uncertainty pervades the factory sector. By February, for instance, orders for
nondefense capital goods less aircraft had slowed in four of five months. The
year-ago change is no longer recessionary but we’d be far more encouraged after
seeing small monthly gains in this category.

New Home Sales (Mar) IFR forecasts a 1.7% drop in the annual rate of new
home sales to 590k. Such would be the fifth straight monthly decline, the 13th
drop in the last 15 months, and the lowest sales rate since January 1995. Look
for the inventory of unsold homes on the market to challenge the January and
February high (9.8 months), even though the number of homes available for sale
was at a 31-month low in February. We have little faith in the Census report
that the median price jumped 8.2% in February to the highest in three months so
we expect a leak lower in March too.

We warn again of the consistent pattern of downward revisions to the prior
month’s rate. In every month since February 2006, Census has revised the sales
rate lower, some times by as much as 100k or more. That was not the case in
December 2007, though we don’t accept that as a sign the sales market had
bottomed.

University of Michigan Sentiment (final) (Apr) We look for no revision in
the final April University of Michigan consumer sentiment index. In the
preliminary report, the index slipped 6.3 points to a 26-year low at 63.2. The
current conditions index and expectations index fell 5.8 points and 6.7 points
marking new lows at 78.4 and 53.4, respectively.

More important to this Friday’s release will be consumers’ inflation
expectations. The 1-year median inflation rate expectation rose to 4.8% from
4.3% in March. It has been rising for three straight months now and from a year
ago, the rate is 1.5 pp higher. The median expected inflation rate of 4.8% is
the highest since July 1982 but with soaring oil and gasoline prices, inflation
expectation should rise even further. The effective Fed funds rate and the
consumer inflation expectation have had a 90% negative correlation since October
2007. However, rapidly rising inflation expectations should put a halt to Fed
funds rate cuts.

DATE EST RELEASE PER EST/ACT REV LAST MED RANGE
22Apr 10:00 Existing Home Sales k,AR Mar 5010 5030 4950 4820 5080
24Apr 08:30 Durable Goods %m/m Mar 2.3 -1.1 0.6 -1.7 2.7
24Apr 08:30 Dur Goods ex Trans %m/m Mar 1.9 -2.4 0.6 -1.6 2.4
24Apr 08:30 Initial Claims k 04/19 375 372 375 375 380
24Apr 08:30 Cont. Claims k 04/12 3000 2984 3000 3000 3050
24Apr 10:00 New Home Sales k,AR Mar 580 590 580 560 600
25Apr 10:00 U of Mich (final) Idx Apr 63.2 63.2 63.2 62.0 64.5
Jeoff.Hall@thomsonreuters.com/Myra.Dsouza@thomsonreuters.com