The Fed remains the center of attention today as investors expect the central bank to come through with more support at the conclusion of its two-day meeting tomorrow. Many investors doubt the relevance of more monetary stimulus to the recent loss of momentum in the economy. But the expectation is nevertheless widespread that the central bank needs to do ‘something.’

We will have to wait another day to find what the Fed plans to do, but growing hopes of additional Fed support has been a major prop behind the market’s recent strength, offsetting the negative developments in Europe. The Fed aside, we have a well subscribed treasury bills auction in Spain, though they had to pay offer a higher interest rate compared to a month ago. Yields on benchmark Spanish bonds remain at levels that limit the government’s capital market access, though they are a tad lower today.

On the domestic data calendar, we have a mixed housing report this morning, with Housing Starts lower than expected and Permits coming in better than expected.

The May Housing Starts data came in weaker than expected, down 4.8% to a seasonally adjusted annual rate of 708K, compared to the 5.4% gain in April to 744K. The prior month’s data was significantly revised higher to 744K from the originally reported 717K.

The positive revision to April aside, the May reading was still weaker than expected, though the drop would be a lot less in the absence of the April revision. Housing Permits came in better than expected, up 7.9% in May vs. the drop of 6% in April (originally reported as a drop of 7%).

Housing Starts have been bouncing around the 700K level in recent months, having bottomed almost two years back at the 478K level. This is an improvement, but admittedly from a very low base. Keep in mind that the long-term historical average for Starts is around double the current level, while Starts at the ‘bubbly’ peak were north of the 2.2 million mark.

We will probably never go back to that level, but we do need to see a sustainable recovery in this key sector of the economy. Sales and inventories have stabilized, but a pricing recovery will like take much longer given the shadow inventory of foreclosure pipeline and the recent loss of momentum in the labor market.

In corporate news, FedEx (FDX) posted modestly better-than-quarterly earnings, but disappointingly guided lower for the coming quarters. Walgreen (WAG) posted in-line quarterly results this morning as same-store sales dropped 6.6% due to the lingering effects of the loss of Express Scripts (ESRX) business last year. Importantly, the drug store chain increased its quarterly dividend by 22% and announced the acquisition of a 45% stake in Alliance Boots for $6.7 billion in cash and stock.

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