Stock futures get lift from rise in housing starts; traders eyeing Fed’s meeting

By Stephen Bernard, AP
Tuesday, September 21, 2010

Stock futures rise on jump in housing starts

NEW YORK — Stock futures rose modestly after a big jump in new home construction added more optimism that the economy will not fall back into recession.

The move in futures was modest, though, as investors waited to see if the Federal Reserve might take new actions to further stimulate the economy. While home construction and other indicators in recent weeks have indicated the economy is growing, expansion remains sluggish. That has some traders anticipating the Fed might announce new plans, or at least hint at restarting some programs like buying Treasurys and mortgage bonds to further increase growth.

The big jump in housing starts fits into a pattern of recent economic reports topping modest forecasts. Beating those expectations has been enough to propel stocks sharply higher throughout the month. Stocks jumped to four-month highs Monday as buying accelerated after the Standard & Poor’s 500 index broke out of its recent trading range, adding confidence to the monthlong rally.

The Commerce Department said construction of new homes and apartments jumped 10.5 percent last month. Economists were expecting a rise of less than 1 percent. Much of the gain was due to a big jump in condominium and apartment construction, which accounts for a smaller part of the housing market.

Applications for building permits, a sign of future activity, grew nearly 2 percent.

Ahead of the opening bell, Dow Jones industrial average futures rose 19, or 0.2 percent, to 10,690. Standard & Poor’s 500 index futures rose 1.30, or 0.1 percent, to 1,137.90, while Nasdaq 100 index futures rose 4.50, or 0.2 percent, to 1,986.25.

The Dow has risen 12 of the past 14 days and is up 7.4 percent for the month.

Investors are likely to keep big moves to a minimum Tuesday morning as they wait to see if the Fed will announce plans to help further spark the economy. Any changes in language by the Fed about if and when it might try to prop up the economy could have two affects on trading.

If the Fed were to announce immediate action or paint a grim picture about the health of the economy, stocks could retreat because new pessimism from the central bank could make investors pause after the recent run-up.

Stocks rallied this month on signs that the economy, while weak, continues to grow and is less likely to fall back into recession. Immediate actions by the Fed to buy Treasurys and mortgage bonds could be considered a signal the central bank is worried about a second recession.

On the other hand, buying bonds would likely drive interest rates on loans and yields on Treasurys even lower. That would make it cheaper for companies and consumers to get loans, which could bolster the economy through new spending.

It also might drive down the yields on Treasurys so low that investors will have no choice but to invest in stocks to get even a modest return on their investments. Even without further Fed intervention, investors can already get better dividend yields from major companies like Intel Corp., General Electric Co. and Home Depot Inc. than they receive from investing in 10-year Treasury notes.

Bond prices rose slightly ahead of the Fed meeting. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.67 percent from 2.70 percent late Monday.

The dollar fell against other major currencies, while gold prices continued to hover near record highs.

Overseas, Britain’s FTSE 100 rose 0.5 percent, Germany’s DAX index rose 0.5 percent, and France’s CAC-40 gained 0.7 percent. Japan’s Nikkei stock average fell 0.3 percent.

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