New home sales fell 8.5% in March to an annualized level of 526,000 units. The level of sales in February was revised down to 575,000 units from an initially reported 590,000. The market had been expecting a decline to 580,000 units from February's initially reported level

All regions saw sales decline - 19.4% in the northeast, 12.5% in the midwest, 4.6% in the south and 12.9% in the west. The number of unsold homes dropped 1.1% to 468,000; however, the drop in sales activity led the months of supply figure to jump to 11 months, the highest it has been since 1981. The median price of new homes collapsed 13.3% on a year-over-year basis.

The staggering decline in house prices, the steep drop in sales and the elevated level of inventories make today's report a fairly ugly one. New home sales dropped 13.1% in the first quarter, worse than the 10.2% drop seen in the fourth. Couple this with the sharp decline in housing starts and building permits in March and there are some signs that conditions in the housing market are worsening from already-weak levels. With housing remaining under strong downward pressure, the Fed will likely see the need to cut interest rates further. We continue to lean towards 50 basis points coming next week followed by 25 basis points in June.

U.S. durable orders decline
Durable goods new orders dropped 0.3% in March after back-to-back declines in both January (-4.4%) and February (-0.9%). Market expectations for March had been for a 0.1% gain. However, the less volatile ex-transportation orders series increased 1.5% compared to a 0.5% gain expected by the market.

Orders for transportation equipment declined 4.6%. Electrical goods/appliances orders were down 6.6%. There was an increase in orders for general machinery and computers/electronics as well as a slight gain in primary metals orders. Overall, shipments dropped 0.4% in March after declining 2.6% in February. Unfilled orders advanced 0.9% in March, while inventories were up 1.1%.

Non-defence capital goods orders excluding aircraft, or core orders, were unchanged in March. Core shipments, advanced 1.2%, but this was after back-to-back declines in January and February.

Core orders were up a solid 1% in the first quarter. Couple this with the robust business equipment production data contained in the industrial production report and it appears likely that equipment and software investment was positive in the first quarter. That being said, growth in core shipments dropped to 0.2% on an annualized basis in the first quarter from 4.9% in the fourth. This could suggest softening capital spending momentum heading into the second quarter. Indeed, our forecast calls for equipment and software spending to contract in the second quarter, largely a function of the tightening in credit conditions. This will be one of the factors leading to negative GDP growth in the second quarter.

U.S. initial jobless claims drop
Initial jobless claims for the week of April 19th dropped to 342,000 from 375,000 in the prior week, although there may have been seasonal adjustment problems because of the early Easter holiday. The less volatile four-week moving average dropped to 369,500 from 376,750.

Bank of Canada's MPR out later on this morning
The Monetary Policy Report (MPR) will expand on the forecast changes included in the press release issued at the conclusion of Tuesday's policy-setting meeting. In the press release, the Bank of Canada indicated that it had shaved their 2008 Canadian economic growth forecast to 1.4% from 1.8%, citing a "deeper and more protracted" U.S. slowdown coupled with more moderate business and consumer spending owing to tighter credit conditions. These same factors have also resulted in a downgrade to their 2009 outlook for GDP growth. Their new projections see the economy growing by 2.4% in 2009 compared to the 2.8% rate that was forecast in January. We are forecasting 1.6% growth in 2008 and 2.3% in 2009, generally in line with the Bank's estimates.

The Bank now projects that inflation will remain below target this year and next. Both all-items and core inflation are expected increase to 2% in 2010. This is a change from January when the Bank expected core inflation to return to target by the end of 2009. Importantly, the Bank signalled that further monetary easing is likely, although they dropped the reference to "in the near-term" contained in the previous statement. Our own estimate sees the Bank cutting rates again, although by only 25 basis points and then pausing to assess the impact of their actions on the economy.