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Isaac Bears Down, Market Anticipates

Sheraz Mian

Hurricane Isaac is heading towards New Orleans and is expected to evolve from a tropical storm to hurricane as it makes landfall later today or early tomorrow. The storm’s impact is far from clear at this stage, but key oil and gas production, refining and petrochemical facilities fall in its likely path. No sustained damage is expected, but even a temporary shutdown of the region’s refining capacity – about a fifth of the nation’s total – will show up in fuel prices nationwide.

While Isaac is in the headlines, the major event that investors are focusing on is Bernanke’s Jackson Hole speech on Friday, in which the Fed chairman is expected to layout the contours of monetary policy. Bernanke had used the same forum to announce the last bond purchase program in 2010 and many seem to be counting on a repeat performance. But the central bank was concerned about deflationary pressures back then, while the pace of economic growth is the primary issue at present.

The question is whether the economy’s growth momentum is weak enough to warrant a new bond purchase program. The last FOMC meeting seemed to be leaning towards more easing, but we have had a few stronger looking economic reports since then, prompting many to wonder if the Fed will actually follow through.

While questions remain about the overall health of the U.S. economy, one major segment that has lately been showing signs of improvement is housing. This has helped build momentum in the stock prices of homebuilders like Lennar (LEN), Toll Brothers (TOL) and PulteGroup (PHA).

We will get a key home price reading today through the June S&P/Case-Shiller home price index. The Case-Shiller index does not represent real-time developments in home prices, but it is nevertheless a good gauge of pricing trends on a national basis.

Today’s data is expected to show positive year-over-year gain for the main 20-city index, which will be the first for that benchmark since the fall of 2010 when government tax credits gave the sector a temporary boost. Excluding that one-off 2010 positive year-over-year gain for the price index, we would have to go back to late 2006 for a positive reading.

Housing is critical to the stabilization of the economic growth outlook as it has knock-on effects in a number of different sectors. Given the favorable developments in this key sector of the economy, housing is expected to be a net positive contributor to GDP growth this year, the first time this would be happening since 2005.

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