The housing market is the expected tipping point for the U.S. economy -- a bubble the bursting of which would drive down consumer spending and compel the

Federal Reserve

to stop raising rates. Instead, housing is apparently merely deflating, not bursting, which is cushioning the economy's landing as the data-dependent Fed contemplates the end of its tightening cycle.

Indeed, the only potential downside to Monday's stronger-than-expected new-housing data is that it gives the Fed more latitude to hike rates further than the 25 basis points expected this week.

Such concerns restrained stocks Monday, but were offset by the salutary effect of approximately $90 billion in merger activity, including a $40 billion transaction in which

Phelps Dodge

(PD) - Get Report

merged with Canadian miners

Inco

(N)

and

Falconbridge

(FAL)

to create one of the world's largest producers of nickel and copper.

Elsewhere,

Johnson & Johnson

(JNJ) - Get Report

bought the consumer health care operations of

Pfizer

(PFE) - Get Report

for $16.6 billion, while Dutch steel giant

Mittal

(MT) - Get Report

closed a deal to acquire

Arcelor

for about $34 billion.

Typically, the shares of the acquirers fell -- Phelps Dodge

most notably -- and the targets rallied. But the positive tidings of the deals helped the

Dow Jones Industrial Average

gain 0.5% to 11,045.28, while the

S&P 500

climbed 0.5% to 1250.56 and the

Nasdaq Composite

gained 0.6% to 2133.67.

Countdown to FOMC

The M&A activity dominated headlines, but the new-home sales report is arguably more important, given the market's myopia over the Fed. The report is the most recent in a string of stronger-than-expected economic data, including recent housing starts, manufacturing, jobless claims and consumer-sentiment reports. The upbeat data have mitigated fears the Fed would overshoot in its tightening campaign, but have revived concerns about more rate hikes beyond this week's meeting. Fed funds futures are even pricing in slight odds -- 12% -- of a

50-basis-point rate hike on Thursday.

The Commerce Department reported a 4.6% increase in new-home sales in May, amounting to 1.234 million homes sold, beating expectations for a 2% decline, or 1.15 million sales, for the month. May's new-home sales surpassed expectations for the second consecutive month. The Commerce Department revised April's new-home sales downward to 1.18 million from 1.20 million, but April's sales remained up 5.9% from March. The median new-home sale price declined in May, but is up 3.1% from one year ago.

"You have a slowdown after heady gains over the last couple of years," says James Bianco, president of Bianco Research. "

But nothing in the slowdown is suggesting we have a bursting bubble."

Homebuilders saw rising prices prior to the data release, which suggests that the homebuilder stocks may have bottomed after their recent thrashing. The market even shrugged off

Lennar's

(LEN) - Get Report

downward revision of its full-year expectations. Lennar ended the day up 2.45%.

KB Homes

(KBH) - Get Report

,

Toll Brothers

(TOL) - Get Report

and

Pulte Homes

(PHM) - Get Report

also have slashed earnings forecasts for the year, but their shares rallied 4.04%, 1.89% and 1.71%, respectively, Monday. The Philadelphia Housing Sector Index gained 1.80%.

There are explanations for the strong home-sales numbers, which seem to defy other indications of a slowing housing market. One may be that the housing prices hit hardest may be in the regions that saw the highest price inflation -- wealthy, urban areas, says Bianco. If this is the case, those homeowners would be the ones least impacted by higher rates and lower home values. If this bears out, the economy will weather the housing slowdown relatively unscathed.

Another factor supporting the housing market's soft landing is the strength of the jobs market and overall corporate financial health, says John Lonski, chief economist at Moody's Investors Service. "The economy and jobs market is benefiting from corporate America's conservative fiscal management, says Lonski. "Companies are in a position to step up capital spending as opposed to cutting back on expenditures, including staff."

Ultimately, if people collect salaries, they can pay their bills.

All About Japan

The U.S. Treasury's 10-year bond traded down in price for the ninth day in a row Monday, its biggest losing streak since 1981, notes Tony Crescenzi, chief bond market strategist at Miller Tabak and

RealMoney.com

contributor. The 10-year slid 2/32 to yield 5.24%, while the two-year closed Monday yielding 5.25%.

"That is all about Japan," says Bianco, adding that nine trading days ago the Bank of Japan stopped pulling liquidity out of the market. Japan's policy meeting ended June 14, and its minutes revealed that officials expressed concern about the impact that ending its quantitative easing has had on Japan's stock market.

The markets' free fall ended then, he says, adding that investors "in general walked away from the safe markets and back toward the risk markets." The flight-to-quality move into Treasuries began to reverse.

Japan isn't likely to return to a sharp liquidity pullout any time soon. The Bank of Japan's finance minister, Toshihiko Fukui, has been dealing with an insider trading scandal that may cost him his job. Due to the hue and cry over Fukui's hawkish policies to date, Japan would have trouble replacing him with a hawk, says Bianco. The scandal may further postpone more quantitative tightening, as well as Japan's expected end to its zero interest rate policy. Many economists had expected Japan to join the chorus of rate increases around the world this July.

"It is the $87,000 investment that will change the world," says Bianco, referring to Fukui's $87,000 investment in a fund managed by Yoshiaki Murakami. Murakami was arrested earlier this month on charges of insider trading.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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