This is why there could be a spring rebound

April's surprise surge in home construction and building permits renewed hope for a spring rebound, after weeks of disappointing economic news.

Amherst Pierpont chief economist Stephen Stanley said the report was the first real piece of economic data that supports his view for a vigorous rebound in the second quarter. Groundbreakings jumped 20.2 percent to a more than seven-year high, and a 10.1 percent increase in permits to 1.14 million was the highest since June 2008.

"February was weak. We were expecting a rebound in March," he said. "We got a rebound but it wasn't as strong as expected. Then everyone got all nervous, and we wait an extra month and voila! Everything shows up in April. I think you have to be a little careful about writing off a second-quarter rebound yet."

Citigroup Economic Surprise Index - United States

The positive data also brought forward expectations for a Fed rate hike. According to Tyler Tucci of RBS, fed funds futures Tuesday show the odds for a September hike are now about 40 percent from 33 percent Monday.

The odds of a December hike moved to 94 percent from 88 percent, reducing bets on a first hike in January. "There were small upward changes but nothing that meaningful," said Tucci, short-term markets and derivatives strategist.

The jump in new home construction also pushed Treasury yields higher, with the 10-year reaching a high of 2.29 percent.

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"The rebound in permits points to solid starts and construction in the months ahead. After the weather-related weakness in starts during Q1, we think the April data are consistent with housing activity returning to normal," wrote Barclays economists.

Bond traders had been anticipating housing starts, as an early read on the housing sector. Housing was seen as one part of the economy that was thought to be solid after weakness in manufacturing and consumer spending.

"You could see the same dynamic for consumer spending," said Stanley. "We might see something very strong in May."

Traders have been fixated on the amount of misses in the recent data, and the expectation for the Fed's first rate hike had once been in September but is now between December and January. Those misses show up in the Citigroup surprise index, which is near a four-year low, could be close to bottoming if the data starts to improve.

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