NEWS RELEASE - May 23, 2008 U.S. Housing Sector Continues to Deteriorate U.S. Housing Sector Continues to Deteriorate U.S. existing home sales declined to 4.89M in April (from 4.94M in March), and was slightly better than the 4.85M expected by the markets. However, despite the better than expected print, existing home sales continue to slide. The 1.0% M/M drop in April meant that existing home sales have now fallen in 8 of the last 9 months, and follows the 1.8% M/M drop in March. On a regional basis, there was a noticeable 6.4% M/M surge in existing home sales in the West, which have risen for the second straight month, coming on the heels of the 2.2% M/M increase in March. Much of this increase in sales in the West may have been due to the modest improvement in home affordability as the median home price is currently 16.7% lower than a year ago, while the increase in the purchase of foreclosed homes may have also been an important contributory factor. Given the reduction in sales nationally, the supply of unsold existing homes in the U.S. has now shot up to 11.2 months in April from 10.0 months in March. And with the rising inventories, prices are likely to continue falling as the excess supply of homes is being worked off. It is also worth noting that the national median home price is now 8% down from the corresponding period last year, which is a slight improvement over the 8.4% Y/Y drop recorded in February. Overall, the report appears to suggest that the distress in the U.S. housing market is continuing, though the pace of decline may have improved slightly. Next week, the Canadian economic calendar will be fairly light, with the Q1 GDP and Q1 current account balance providing the highlights. We are expecting Canadian economic activity to slow to a crawl in Q1, with GDP growing by a meagre 0.2% Q/Q ann. following the equally low +0.8% Q/Q growth rate in Q4. Our forecast is below the +0.6% Q/Q market consensus, and much lower than the +1.0% Q/Q forecast by the BoC. In terms of current account, our call is for the Canadian current account to return to a surplus of $2.3B in Q1 following the deficit of $0.5B in Q4 - which was the first quarterly deficit since Q1 1999. In the U.S., the market's attention next week will be focused on the April personal income and spending report. Our on-consensus call is for income to rise by a modest 0.2% M/M, with spending increasing by a similar magnitude during the month. And given the Fed's heightened attention to the rising inflation risks (highlighted in the recently published FOMC minutes), markets will by drawn to the print on core PCE inflation. Our expectation is for the core PCE deflator to rise by 0.1% M/M, with the annual rate of inflation remaining flat at 2.1% Y/Y.  Source: TD Economics