New U.S. housing starts and permits rebounded in May from record lows as ground-breaking for multifamily units surged after tumbling the prior month, a government report showed on Tuesday.

KEY POINTS: * The Commerce Department said housing starts jumped 17.2 percent to a seasonally adjusted annual rate of 532,000 units, from April's revised 454,000 units. Ground-breaking for multifamily units surged 61.7 percent. Multifamily unit starts fell 49.4 percent in April. * Compared to the same period last year, housing starts dived 45.2 percent. Analysts polled by Reuters had expected an annual rate of 490,000 units for May. * New building permits, which give a sense of future home construction, rose 4.0 percent, the biggest advance since June last year, to 518,000 units in May. That compared to analysts' forecasts for 500,000 units. Compared to the same period a year-ago, building permits plummeted 47 percent.

PRODUCER PRICE INDEX: U.S. producer prices rose by less than expected in May despite a jump in gasoline costs, government data on Tuesday showed, while prices compared with a year ago notched their steepest falls since 1949.

KEY POINTS: * The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate increased by 0.2 percent versus a 0.3 percent April rise. * Analysts polled by Reuters had expected producer prices to be 0.6 percent higher last month.

COMMENTS:

YRA HARRIS. PRINCIPAL, PRAXIS TRADING, CHICAGO:

This market is so far wrongsided, so far ahead of itself in looking at inflation.

We have a huge negative output gap, putting enormous pressures on pricing coming from the factory gate, regardless of raw material costs.

That's why this number is so important, It really puts to bed those inflation hawks. They're looking at a horizon I certainly can't see.

TJ MARTA, CHIEF MARKETS STRATEGIST, MARTA ON THE MARKETS,

SCOTCH PLAINS, NEW JERSEY:

It's going to take down the inflation hawks. This is the most benign reading yet. We have housing levels that are quite strong.

ZACH PANDL, ECONOMIST, NOMURA SECURITIES, NEW YORK:

Housing Starts: This starts report is actually very encouraging. Single-family housing starts, where the core of the inventory problem is in the housing market, are really coming back at a good pace. The month-over-month gains have increased every month since February; suggests that builders are replacing lost activity at least gradually. It is an encouraging sign that we have found the bottom in housing starts. I would emphasize though that housing activity does remain at extraordinarily low levels, we really need to come back strongly from here.

PPI: This is still consistent with inflation being a very moderate risk at this time.

KATHY LIEN, DIRECTOR OF CURRENCY RESEARCH, GLOBAL FOREX

TRADING:

The numbers are showing an overall improvement in the housing markets and it doesn't seem that this reading is an outlier. The headline number may look like a blockbuster but it is not: we are coming from a huge drop in April, so in May there was a considerable bounce closer to the levels we've seen in March. Nonetheless, we are at or close to the bottom in the housing markets and that will help boost risk appetite.

The forex market is not showing a considerable reaction because uncertainty regarding the BRIC summit is what's been driving the dollar and the euro in the past couple of days.

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO., GREENWICH,

CONNECTICUT:

Both are a bit better than expected. I was hoping it would firm stock prices a little bit. We got hit pretty hard yesterday and we're seeing a little bit of a rally, I guess. One surprise here is the continuation of crude where every fundamental analyst continues to think it's overpriced yet we've recovered all the losses from yesterday.

One wonders if that is a proxy for growth in the future, just like stock prices rally sharply 6 months before an economic recovery, is crude pricing a similar forecasting measure that the economy globally will continue to firm and eventually put some constraints on the crude oil supply.

The market was up 12 out of 14 weeks, we're up 42 percent. We touched a new intraday high on Thursday. But still viewed is kind of 900 to 920 on the S&P is level support -- may take a little time. We've been spoiled by the one-sided movement by the S&P over the past three months. It will probably be a bit more choppier trading moving irregularly higher, but again I think we will be overall supported on pullbacks.

JEFF KLEINTOP, CHIEF MARKET STRATEGIST, LPL FINANCIAL, BOSTON:

I think the housing starts were better than expected, but I'm not sure that's good news. It might mean more inventory coming to the market over the next several months. But then, housing starts are down over 80 percent from the peak, so I think we can stand a little bounce today.

As for PPI, excluding food and energy it continues to decline, suggesting there's still a lot of deflation facing producers. That may turn around by the end of the year as demand turns around, but investors are already looking toward inflation and have already looked past any weakness today.

GARY THAYER, SENIOR ECONOMIST, WELLS FARGO ADVISORS, ST. LOUIS,

MISSOURI:

We had two sharp declines in housing starts in the previous two months and there was a small downward revision to April housing starts. The May housing starts figure was a better-than-expected number, but still is just a modest recovery from earlier weakness. It's a sign that housing is stabilizing, but it's too early to say that we've seen the bottom. We'd probably need to see several months of stronger sales and better housing starts to give a convincing signal that we're going to see a housing recovery.

From the PPI reading, it sure doesn't look like we have much inflation. A lot of people have said they are worried about inflation, but I think that's far down the road. This year we will probably see very low inflation numbers. Excluding food and energy, core PPI was negative in May. Outside of commodities, there's not a lot of inflation in the pipeline.

MARKET REACTION: STOCKS: U.S. stock indexes were slightly higher. BONDS: U.S. Treasury debt prices extended losses. DOLLAR: U.S. dollar fell against the euro, rose against the yen.

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