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INSTANT VIEW: Consumer prices, housing starts sink in November

NEW YORK (Reuters) - Consumer prices plunged at a record rate for a second straight month during November, according to a government report on Tuesday that is likely to fan fears that economic recession is rapidly heightening risks of deflation.

New U.S. housing starts and permits plunged to record lows in November, as long-standing problems in the housing market continued to weigh on the U.S. economy, a Commerce Department report showed on Tuesday.]

KEY POINTS:

CPI * The Labor Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. * Core prices that exclude food and energy items were flat in November after declining 0.1 percent in October. * The drop in overall prices exceeded forecasts by Wall Street economists who had expected a 1.2 percent decline. * On a year-over-year basis, consumer prices were up 1.1 percent after a 3.7 percent increase in October. It was the smallest rise since mid-2002.

HOUSING * Housing starts fell 18.9 percent to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October. That was much less than the 740,000 starts Wall Street analysts expected to see for November. * New building permits, which give a sense of future home construction, plummeted 15.6 percent to 616,000 units from 730,000 units in October. That was also much below Wall Street analyst estimates of 700,000.

COMMENTS:

MARC PADO, U.S. MARKET STRATEGIST, CANTOR FITZGERALD & CO., SAN FRANCISCO:

HOUSING: “It reflects how bad the economy currently is, but these are starts and permits to build, this means they’re really reining in on inventory and if you can keep controls on inventory, then ultimately that’s supportive of price.

“As bad as this is for the homebuilders, it’s probably good news for the bigger picture, that down the road we’ll have less inventory. the National Association of Homebuilders, in their most recent statement, said they couldn’t compete with foreclosure sales.”

MICHAEL CHEAH, SENIOR PORTFOLIO MANAGER, AIG SUNAMERICA ASSET MANAGEMENT, JERSEY CITY, NEW JERSEY:

“It should not surprise people that we are going to have significantly subdued inflation because when the economy was growing we hardly had any inflation. Now we are in some form of global slowdown, and in the face of a massive reversal in speculative buying of commodities.”

In Treasuries, “to some extent the market may be overbought. To some extent we are facing sticker shock. Most of us are trying to overcome the idea that we are Japan. We are not Japan, but it’s important to recognize that we are playing from the same strip. In a sense, what we are doing is basically repeating what the Japanese went through... the central bank pumping in a lot of liquidity, the banks don’t want to lend that money, and the banks use that money to buy the safest assets, Treasuries.”

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO, GREENWICH CONNECTICUT:

CPI:”I think it’s a lukewarm, slightly positive number that doesn’t give any concerns about deflation even though the broad based number is a record. It’s an energy-derived number that’s not a true measure of the economy.”

HOUSING: “Initially the reaction would be negative. In the long run, it may build favorably. The more we can have less housing starts, the more we can shrink existing inventory.”

THOMAS DI GALOMA, HEAD OF U.S. TREASURY TRADING, JEFFERIES & CO., NEW YORK:

“I think we’re in a deflationary spiral that will probably go on until sometime next year. I think it will probably go on through the majority of 2009.”

“CPI was actually a little bit better than I expected, I expected it to be down two percent. The real shocker here is what housing starts have done. The bond market kind of selling off because Goldman earnings were a little bit better than people expected.”

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:

“The housing starts data is another bad sign for the overall U.S. outlook. There’s zero sign of any stabilization, dashing what had been some optimism that we were perhaps bottoming out. Inflation, meanwhile, is just not an issue and doesn’t seem like it’s going to be one for quite a while. This all adds to the picture of a dramatic U.S. slowdown.”

MARKET REACTION: STOCKS: U.S. equity index futures steady at higher levels. BONDS: U.S. 30-year Treasury bond yields drops to record low . DOLLAR: U.S. dollar turns negative versus euro. RATE FUTURES: Fed fund futures steady, showing 68 percent chance of 75 basis point rate cut.

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