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On Putin, Housing and the Fed

Sheraz Mian

Tuesday, March 18, 2014

The Crimean situation appears headed for its drop scene, with Russia annexing this breakaway Ukrainian region. But markets appear willing to buy into President Putin’s assurances that his country had no designs on the rest of Ukraine.

Data on the home front this morning shows some improvement in the housing market and still no signs of inflation in the economy. The Fed is also in the spotlight, with the two-day FOMC meeting getting underway today.

In his almost hour-long speech to the Russian parliament, President Putin defended the Crimean developments and compared the situation to the German reunification. As was widely expected, he signed the treaty combining Crimea with Russia. Global markets were surprisingly reassured by his comments that Russia favored the territorial integrity of Ukraine and had no designs on any parts or regions of that country.

U.S. futures turned green after these comments hit the wires, having been modestly in the red all morning. Hard to tell how sustainable this favorable market sentiment will turn out to be. But his comments appear to have eased concerns, for now at least, that Russia wouldn’t follow up its Crimean actions by making moves on Eastern and Southern parts of Ukraine.  

Russia aside, we got modestly positive Housing Starts and non-threatening CPI data. Housing Starts were a tad lower than expected, but Permits -- which tell us about future home construction activity -- showed a lot of strength. The mixed but nevertheless favorable home construction data follows recovery in the homebuilder sentiment index yesterday and reconfirms that the sharp fall-off the month before was primarily due to this year’s unusually harsh winter.

That said, activity remains short of pre-winter levels and likely points toward other headwinds facing the home construction market like shortage of building lots, skilled labor and low inventory of new homes. Interest rates, while low by historical standards, have also gone up from the year-earlier level, weighing on affordability metrics.

The market had a very strong day on Monday and appears on track to have a positive open, thanks to the non-threatening comments from Putin and favorable-looking economic data. The market’s overall movement year to date has been no different than a roller-coaster ride, not that far from where we started the year. With the first quarter coming to an end in less than two weeks, this could very well be a sign of things to come.

Sheraz Mian
Director of Research

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