NEWS / Foreign Exchange

Sales of new homes fell 3.9% in February

New Home Sales (February)

Actual: 848K Consensus: 882K Prior: 1047K

Sales of new homes fell 3.9% in February to a seasonally adjusted annual rate of 848K, the lowest in nearly seven years. This rate was 18.3% below a year earlier. Inventories rose to an 8.1 months supply from 7.3 months in January. Some analysts used new home sales figures as evidence that the housing market has not bottomed yet. Once again, the subprime crunch appeared as a possible driver of the sales??™ slump. Although this could be true to some extent, we find some reasons to be cautious rather than pessimists. First, though seasonally adjusted, sales of new homes were clouded by unusually colder temperatures particularly in the Northeast and Midwest. Second and more relevant is that the overall picture of housing demand in February was mixed with sales of previously owned homes rising for the third consecutive month. This suggests that buyers could be shifting from new to existing homes likely because the later are cheaper and prices are expected to keep falling.

Consumer Confidence Index (March)

Actual: 107.2 Consensus: 109.0 Prior: 111.2

As expected, consumer assessments on economic conditions worsened in March. Higher gasoline prices together with increasing volatility in financial markets turned consumers more uncertain about the future. As a result, the Expectations Index slipped to 86.9 from 93.8 in February. Meanwhile, the Present Situation Index remained virtually unaltered at 137.6 from 137.1 in February. Perceptions on labor markets were mixed. Among respondents, those claming jobs are ???hard to get??? rose to 19.1% from 17.9%, while those saying jobs are ???plentiful??? increased to 30.5% from 27.8% in February.

Durable Goods Orders & Excluding Transportation (February)

Actual: 2.5, -0.1% Consensus: 3.5, 1.8 % Prior: -9.3, -4.0%

Despite the impulse given by the transportation component, durable goods orders disappointed. Excluding transportation the decline was driven by primary metals (-1%), fabricated metals (-2.3%), machinery (-0.4%), and electrical equipment (-5.5%). Orders of computer and electronic products rebounded 6.4% after falling 10% in January. Capital goods orders excluding aircraft slipped 1.2% following a 7.4% decline in the previous month. Capital goods orders decreased 2.0% from a year earlier; the second straight yearover- year decline. Expenditures on capital investment moderated in Q406 and early this year mainly as a result of lower economic growth but also accelerated by an inventories-correction process, particularly in the autos and construction industries. This correction may be coming to an end as suggested by February??™s manufacturing production figures. Therefore, we expect capital investment to continue expanding, though at a moderated pace than in the past year. Growth in non-residential investment will be boosted by relatively low interest rates, solid balance sheets and strong profitability.

Personal Income & Spending (February)

Actual: 0.6, 0.6% Consensus: 0.3%, 0.3% Prior: 1.0, 0.5%

Real disposable personal income rose 0.1%, 2.6% higher than the level of ayear earlier. Adjusted for inflation PCE increased 0.2% (3.2% year-over-year) boosted by a 0.5% increased in spending on services, while both spending on durable and nondurable goods declined, largely as a result of higher energy prices and untypical weather conditions. We judge that personal income and spending remain solid and will continue fueling economic growth. From the prices side, year-over-year PCE core inflation rose to 2.4%, well above the upper range of Fed??™s comfort zone (1-2%). This supports our base scenario of an extended pause in monetary policy.