Hopes on Housing, Inflation Data

GOOD MORNING. Stocks in Asia closed mixed today; U.S. futures are pointing to a mixed open.

A couple of big economic reports are due out this morning and are likely to have a heavy impact on trading today. The government releases figures on the consumer price index at 8:30 a.m. and analysts expect the CPI to come in at 0.2% in October, unchanged from September and down from 0.4% in August. The government also plans to release October housing starts, and forecasts call for a slight gain from September’s seasonally adjusted annual pace of 590,000. Construction of new homes and apartments is expected to grow 1.7%, to 600,000, and building permits are expected to inch up 1.2% to an annual rate of 580,000 units.

A little bit of inflation is always a good thing, and that’s just what traders will be hoping to see in the CPI numbers. Core CPI is now 1.5% above its level a year ago. But an unexpected dip in the index could shock the markets, signaling that deflation remains a bigger risk than anticipated. “For the moment, deflationary risks are still more likely given the fragile state of many bank loan portfolios,” says Andres Carbacho-Burgos, an economist with Moody’s Economy.com. Though the U.S. is emerging from recession, there’s likely to be less upward price pressure than usual, he adds, because of the weak job market and high savings rate. Plus, oil isn’t expected to spike past $100 a barrel until “well after” the economy has recovered, keeping energy price hikes moderate. Inflation could decline to a 1% annualized pace in the first half of 2010, he forecasts, before bouncing back as the recovery gains steam in the second half of the year. The upside: with inflation remaining low, the Fed is unlikely to raise interest rates any time soon.

As for housing, analysts say the market is looking healthier. Construction rose to the highest level in nine months in August. Sales have been improving, up an annualized 54% from the second quarter, and first-time homebuyers have been coming back to the market thanks to government tax credits that have helped generate an estimated 400,000 sales since February. A recent extension of that tax credit (up to $8,000) is likely to encourage 500,000 new sales, says economist Celia Chen of Moody’s Economy.com. Still, census and industry data indicate there are still more vacant houses than the markets can absorb, and the number of foreclosed and “distressed” units has been rising. In all, an additional 4.25 million distressed homes could flood the market, and because those units are likely to linger, says Chen, “the recent stabilization in house prices will quickly evaporate.” Despite the uptick in sales and construction, sentiment among builders is also firmly in negative territory, according to the National Association of Homebuilders.

IN OTHER NEWS:

Are Americans ready to head back to the mall? Three retail clothing companies report third-quarter earnings after the market closes today, but investors will likely be looking past today’s results towards holiday sales in the crucial fourth quarter. So far this year, retail sales of clothing and accessories are down 4.9% compared to the first ten months of last year.

Phillips-Van Heusen (PVH), which owns Calvin Klein, IZOD, and other brands, is expected to report earnings of 89 cents a share, down from $1.10 in the same quarter last year. Analysts anticipate revenue of $669.13 million, down 8% from last year. So far for 2009, the company has reported same-store sales down 8% for the first quarter and 3% for the second quarter, compared to last year. Investors’ attention will likely focus on the performance of the Calvin Klein brand, currently the fastest-growing segment of the business.

For Limited Brands (LTD), the company behind Victoria’s Secret and Bath & Body Works, the holiday quarter will make or break the year. The company has already reported that same-store sales for the third quarter were down 2% year-over-year. Analysts expect a third-quarter loss of 1 cent per share, down from earnings of 1 cent per share a year ago, on revenue of $1.77 billion, representing a 3.9% decline.

Bath & Body Works seems to be well-positioned for the holidays, but Victoria’s Secret has been “disappointing lately” and needs to “get on track,” says Barbara Wyckoff, an analyst with Jesup & Lamont Securities Corporation. Looking ahead, the company has started some international expansion, including into small “travel” stores in airports, and that could be a growth opportunity over the next three to five years, she says.

For teen retailer Hot Topic (HOTT), the issue isn’t so much holiday sales as it is vampires and skinny jeans. Hot Topic faces tough comparisons to last year’s success with “Twilight” merchandise, but the sequel “New Moon” comes out on Friday, and early ticket sales indicate it will be just as popular as the first installment, says Holly Guthrie, an analyst with Boenning & Scattergood, Inc. There are two more “Twilight” books set to become movies, but third and fourth sequels may not sell as much merchandise as earlier installments.

On the basic fashion front, Hot Topic was ahead of the trend on tight, colored denim last year, but this year their women’s fashion business has been comparatively weak, Guthrie says. The company is also beginning to build a music-download business called ShockHound, which could start producing some revenue next year. Hot Topic investors will know in a few weeks how strong this year’s “Twilight” franchise sales are, but investors in Phillips-Van Heusen and Limited Brands will have to wait until December for a verdict on their years.