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Has weather clouded readings on this week’s important releases?

Part 8
Has weather clouded readings on this week’s important releases? (Part 8 of 10)

Seeking fresh supply: Why pending home sales were flat in January

What did January’s Index value imply?

The indicator increased marginally, by 0.1% to 95 in January from an upwardly revised 94.9 in December, and came in 9% below January 2013’s reading. December’s index reading is the PHSI’s lowest level since November 2011, when the index was at 94.6. The decline in the index was attributed to an unusually cold December and January and home prices rising faster than incomes due to lower home supply and reduced inventory limiting buyer choices.

Part 8Enlarge Graph

How do new and pending home sales impact fixed income markets?

An increase in new and pending home sales would imply that demand for housing is increasing. Other factors remaining constant, this would imply that the economy is recovering, as people purchase homes only when they’re confident about their prospects and the country’s economic prospects in general. So housing is a very important consumer confidence indicator.

An increase in home sales would also mean that the economy is growing, and, other things remaining constant, the Fed would curtail its economic stimulus program. This would mean, other factors remaining constant, there would be lower liquidity in the financial markets and interest rates would rise and bond prices would fall. A decline in home sales would mean the opposite.

Housing’s multiplier effect

Housing also impacts several other sectors, as an increase or decrease in demand would impact construction companies as well as home furnishing and appliance firms and would create jobs in other sectors and effectively create a multiplier effect throughout the economy.

We can see this impact in the last quarter releases for home improvement chains Home Depot (HD) and Lowe’s (LOW). Both companies reported higher-than-expected profits for their fourth fiscal quarters. Home Depot (HD) reported earnings per share (or EPS) at 73 cents, ahead of analyst estimates of 71 cents per share. Lowe’s (LOW) reported diluted earnings per share of $0.29, an increase of 11.5% year-on-year. The world’s largest electronics retailer, Best Buy Co. (BBY), posted earnings from continuing operations at $1.24 per share ahead of Street expectations of $1.01 per share in its last fiscal quarter.

To find out whether the results of two manufacturing surveys conducted by the Richmond and Kansas City Fed revealed increases in business activity, move on to Part 9 of this series.

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