Investors to Leave Fed Stimulus Train to Revisit Fundamentals?

Karen Tso, CNBC Anchor

Federal Reserve chief Ben Bernanke took aim at the housing market this month, saying it was one missing piston in the economic engine.

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The Case-Shiller Home Price Index on Tuesday will be the economic equivalent of a peek under the U.S. hood at the start of the third quarter, with some wondering if the hum of activity has started up again.

The much-watched housing indexheralded the first positive annual growth rate since the summer of 2010 last month.

But some fear housing is suffering another false start: A closer look at the report showed challenges for six cities, including Atlanta, Chicago, Las Vegas, Los Angeles, New York, and San Diego.

The ongoing housing struggle is about the one thing economists agree on and it’s why even some of those fiercely opposed a third round of quantitative easing (QE3) are less critical about one aspect of the Fed’s program — pouring $40 billion a month into mortgage-backed securities purchases (MBS) for the foreseeable future (though of course plenty of skeptics of this policy do exist).

Take Fed hawk Richard Fisher, who dissented three times on further stimulus while a voting member of the Fed’s interest-rate setting board last year. The Dallas Federal Reserve Bank President joined those last week wishing the housing market Godspeed.

“The program could help offset some of the drag from higher government-sponsored entities’ fees that have been recently levied, will likely lower the spreads between MBS and Treasurys and should put further juice behind the housing market,” said Fischer. (Read More: Blame Congress for Problems in US Economy: Fed's Fisher.)

But few fund managers believe housing will squeeze out benefits in the interim even if spreads between Treasurys and mortgage rates continue to narrow.

The majority view is that it’s not borrowing costs that are the problem, but the credit criteria of lenders and the forced deleveraging of households.

Main Street is at least putting on a hearty façade lately. The University of Michigan Consumer Sentiment Index this month produced the best reading since May and prior to that all the way back to the recession in October 2007. Tomorrow gives us another update on the strength of the wallet as the November presidential election and “fiscal cliff” approach.

In Europe, we’d also happily trade the U.S. for its headline growth rate on Thursday. U.S. second quarter gross domestic product will likely climb to a upwardly revised annualized 1.6 percent.

But the thorny state of affairs in the stop-start manufacturing sector could spoil the economic picture — and pierce the QE3 bubble.

Out of all the data that deserve our attention stateside this week, the most important is August durable goods orders. This forward indicator of industrial production and capital spending could slump to -4.1 percent, and RBC is bracing for a 7 percent tumble.

Durable goods orders a month earlier rose 4.1 percent, but orders were flimsy stripping out the transportation sector, falling 0.4 percent. The trend by the core measure has been down four out of five months. It’s this lack of business investment by Corporate America that bodes ill for future U.S. growth.

Those that kept riding the U.S. stock market to multiyear highs last week on a giddy Fed stimulus train might stop at the station and revisit fundamentals. Perhaps the real data will count again this week, if only for a moment.