What a Week: Feeling Groovy

St. Louis Fed President William Poole commented on the lower inflation report at an event in Washington, D.C., Thursday. "It's another little scrap of evidence in the right direction," he said, adding that he couldn't say that "this number means we're out of the woods on inflation."

The housing market provided a scrap of evidence in the wrong direction Friday, however. As the turn-key element for most economists' forecasts, including the Fed's, the depth of housing's recession and how much its troubles spill into the broader economy is central to the Fed's 'on pause' scenario.

Housing starts fell 14.6% in October to a six-year low, and building permits fell 5.2% in the month to a nine-month low. The data put October housing starts down 27.4% year over year. While many have pointed to stronger levels of mortgage applications and two months of rising new-home sales as signs of a bottoming in housing, Friday's data paint a gloomier picture.

"The rapid rate of decline introduced downside risk to residential investment this quarter and in early 2007, potentially delaying improvement in the housing trajectory and implying weaker GDP growth in this and the next quarter," writes Peter Kretzmer, senior economist at Bank of America.

The bond market reveals the housing slump's import. After selling off through most of the week, bond traders appeared to be capitulating to the notion that the economy is not headed for a consumer-led recession. But Friday's housing data caused an about-face as the bearish bunch took the deepest decline in housing starts in six years as signs of trouble.

The 30-year Treasury bond rallied 25/32 to yield 4.69% (bond prices move inversely to yields). The 10-year note gained 16/32 to yield 4.6% and the two-year added 5/32 to yield 4.76%.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting