NEW YORK | Tue Aug 17, 2010 9:06am EDT

(Reuters) – U.S. housing starts rose but to a much weaker rate than expected in July, while permits for future home construction fell to their lowest level in more than a year, according to a government report on Tuesday that pointed to a weak housing market.

U.S. producer prices rose in July for the first time in four months, pulled by higher prices for food and consumer goods, a U.S. government report showed on Tuesday.

KEY POINTS:

HOUSING STARTS: * The Commerce Department said housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 units. * June’s housing starts were revised to show an 8.7 percent fall, which was previously reported as a 5 percent drop. * Analysts polled by Reuters had expected housing starts to rise to 560,000 units. * Compared to July last year, groundbreaking activity was down 7 percent. * New building permits, which give a sense of future home construction, dropped 3.1 percent to a 565,000-unit pace last month, the lowest level since May 2009. * That followed a 1.6 percent rise in June and compared to analysts’ forecasts for a slip to 580,000 units.

PRODUCER PRICE INDEX: * The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate rose 0.2 percent, in line with Wall Street analyst expectations, after dipping 0.5 percent in June. * In the 12 months to July, producer prices increased 4.2 percent after rising 2.8 percent in May. * The year-on-year increase was also in line with forecasts.

COMMENTS:

JOHN CANALLY, INVESTMENT STRATEGIST, ECONOMIST, LPL FINANCIAL, BOSTON:

“The market’s looking for some inflation and we got some on both the core and overall (PPI), which should ease some deflation fears.

“But on the other side of the coin, we had the housing starts data which got a bounce from the prior month, which was expected, but the bounce was a little softer than we thought.

“We’re still getting data post-housing credit that is still weak and not indicative of a market that can sustain itself.

“That ties into a lot of other data recently that has the market worried about a double dip. We still think it’s slow growth rather than a double dip, but each week that passes you tend to get a little more concerned if you don’t get better activity indicators.”

CAMILLA SUTTON, CURRENCY STRATEGIST, SCOTIA CAPITAL, TORONTO:

“It’s a mixed set of data, with a disappointing reading on housing starts and building permits and a slightly stronger PPI report. Actually, at this point some signs of inflation would be soothing to markets amid fears of deflation. But ongoing problems with the housing markets are so great that it will likely offset any positive effect from an increase in prices.” “Forex markets are just taking a breather after the violent swings of last week in euro/dollar and dollar/yen. Traders are still looking for a catalyst to take the dollar in one direction or the other.”

MARK VITNER, SENIOR ECONOMIST, WELLS FARGO SECURITIES, CHARLOTTE, NORTH CAROLINA:

“This is more of a payback from the end of the tax credit. It is not that surprising given the NAHB numbers that were out yesterday which showed really abysmal buyer traffic and expectations for future sales are about as low as they were back before the tax credit was even passed.

 “We had the previous month’s number revised down a little, and we had a nice pop in multi-family, which people kind of forget about because it is so low right now, without that the drop would have been worse.”

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:

“Both these indicators are languishing. It’s nothing new to see the housing market stuck in a rut. On PPI, the core inflation is up a little more than expected year-over-year, which might cause some moderation in U.S. yields. That would help the dollar recover a bit against the yen. But the sentiment out there is there are still problems to come, and with the 10-year yield at 2.60 percent, there’s absolutely no reason for the dollar to rally against the yen right now. We expect another run at 85 yen and then a move to the 84.70-80 area.”

JIM BARRETT, SENIOR MARKET STRATEGIST, LIND-WALDOCK, CHICAGO:

“The slow growth will continue. It perfectly reflects the mood we are in with the under-utilization. We are barely moving forward.”

MARKET REACTION: STOCKS: U.S. stock index futures pare gains after housing, PPI data. BONDS: U.S. Treasury debt prices hold losses. DOLLAR: U.S. dollar remains lower versus euro.