Keys to the Week Ahead

The past week's dominant market-mover was not on the economic calendar, but has been a hot topic for quite some time now: the housing market. Concerns about the subprime market were a focal point for discussions in and about the markets, with the media fixated on the subject.

This story will take time to be purged from the markets and could in fact balloon into something far more important if the problems in the subprime market spill over into other segments of the financial system. So far, the problems have been isolated, with no meaningful impact elsewhere.

Any potential meaningful spillover from the subprime market is best gauged by tracking credit spreads, particularly by tracking yield spreads on corporate bonds on the lower end of the credit spectrum, or junk bonds. Also important to track is the performance of the emerging debt markets, which would also likely be first in line to deteriorate in the event of subprime spillover. These securities continue to perform well compared to Treasuries.

Outside the housing sector, a number of notable figures are scheduled for the week ahead. No major data are due out on Monday. On Tuesday, existing home sales will be released. Key to that report and future sales reports will be the inventory data. Inventories of unsold homes have fallen about 350,000 from the peak to 2.96 million, but that figure is still about 1 million homes above normal. Also on Tuesday is the release of durable goods orders, a very important gauge of business spending, which had softened in the second half of 2006. In addition, there's consumer confidence, which has been higher lately, making worries about the household sector seem misplaced.

On Wednesday, mortgage applications will come out first, putting the focus back on housing. Later in the morning, at 10 a.m. ET, data for new home sales will be released. Inventories will be the key focal point. Before the new-home-sales release, at 8:30 a.m. ET, GDP for the fourth quarter will be revised. Most expect an unusually sharp downward revision that would put GDP at a 2.3% rate of gain instead of the initially reported 3.5%. This will keep the interest rate markets stable, all else equal.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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