Strong Economic Data Dims Hopes Fed Will Cut Rates

Sales of new U.S. homes rose more than expected in December while orders for durable goods climbed sharply, dimming prospects that the Federal Reserve may cut benchmark interest rates this year.

While new-home sales last year posted the biggest drop in 16 years, the pickup in December, and the big rise in durable goods orders encouraged the view that the slumping housing and factory sectors may have bottomed out.

Sales of new U.S. homes rose 4.8% in December, to an annual pace of 1.12 million units. The median home sales price rose to $235,000 in December from $232,200 in November as builders cut the number of homes on the market, the Commerce Department reported on Friday.

While some analysts attributed the strong sales to unseasonably warm weather in December, they expressed concerns that the gains would encourage inflation hawks on the Federal Reserve's rate-setting committee, which meets next Tuesday and Wednesday.

"If this economy gets too good because of housing, or not (because of) housing, I worry what the Federal Reserve is going to do," said Hugh Johnson, chief investment officer at Johnson Illington Advisors.

Stocks Head Lower

Stocks tumbled Friday after the economic data raised concerns about the outlook for inflation and interest rates.

Short-term interest rate futures prices imply the Fed will keep rates steady for much of 2007. Earlier this month futures priced at least a half point in rate cuts for the year.

U.S. Treasury debt prices tested lows after the housing data, while the dollar rose against the euro and the yen.

For all of 2006, the Department said 1.061 million new homes were sold, down 17.3% from 2005. That was the biggest drop in 16 years and the first annual decline after a five-year rally. The data followed Thursday's report by a trade group that existing home sales, which make up 85% of the housing market, fell 0.8%.

New orders for U.S.-made durable goods rose a larger-than-expected 3.1% in December as demand for Boeing jetliners soared and most other sectors showed surprising strength, a second Commerce Department report showed.

Excluding volatile transportation orders, which are heavily skewed by aircraft, durable goods orders rose 2.3% in December following two monthly declines.

Capital Spending Strong

"The economy this year is extremely dependent on both exports and capital spending and this figure suggests that capital spending will grow at a significant rate this year so it's a definite positive," said Michael Metz, chief investment strategist at Oppenheimer.

"The Fed has to be reassured by all of this and the housing figures support the view of a soft landing in that sector. All this suggests there is no need for the Fed to do anything," Metz added.

In 2006, new durable goods orders rose 7% from 2005, marking the third straight annual gain. Shipments for the full year increased 5.6 percent, also the third straight gain.

Boeing finished the year with strong orders, pushing its 2006 order book to 1,044 planes, a record that beat rival Airbus for the first time since 2000.

In December, transportation equipment orders rose 4.8% on the back of a 26.5% rise in civilian aircraft orders and a 20.5% rise in defense aircraft and parts.

Excluding defense, orders during the month rose 3.9%, far outstripping analysts' expectations of a 0.3% rise.

Nondefense capital goods orders excluding aircraft, a proxy for business spending, jumped 2.4% in December following declines in the previous two months. Analysts had expected a 0.6% rise in this category.

Motor vehicles and parts orders also posted a strong gain of 6.8%, the highest monthly gain since August 2004, when they rose 8.2%.