I have updated my ECB-ometer ahead of next week's policy meeting. The model suggests an "average interest rate recommendation" among the 21 Governing Council members of -10 bp, insufficient to trigger a forecast of a rate cut (threshold -12.5 bp) but consistent with a clear easing bias. This is the most dovish reading for 30 months - see chart. (More explanation of the model can be found here.)

The further shift over the last month reflects a combination of slower fourth-quarter GDP growth, a rise in the euro and a decline in short-term government bond yields, partly reflecting further credit market deterioration. With business and consumer confidence stable but lacklustre, these changes would have triggered a forecast rate cut but for continuing high inflation and money supply readings.

The model is now diverging significantly from the neutral policy stance articulated by ECB President Trichet at the last press conference, not to mention recent more hawkish comments from Bundesbank President Weber. The Bundesbank intervention is probably aimed at heading off a shift to more dovish language in next week's statement. It may succeed this month but pressure continues to build for a rate cut in the second quarter, with May currently looking the most likely month.

Are the Fed and the ECB on different planets?

Yesterday, Fed Chairman Bernanke signalled a further cut in official rates on 18 March despite recent unfavourable inflation news and the 225 bp of policy stimulus already in the pipeline, not to mention a substantial expansionary fiscal package.

Meanwhile, Bundesbank President Weber poured water on hopes of a cut in ECB rates even though credit conditions are as bad in Europe as in the US and growth has moved below trend, with a risk of serious weakness in several Eurozone economies.

This policy divergence looks unsustainable. With the real Fed funds rate approaching historical post-recessionary levels, the US central bank may shift to a neutral bias after the expected March cut. Despite Weber's comments, the ECB is unlikely to reverse its recent shift to a more neutral stance at next week's meeting. Events continue to play out similarly to 2001 (see here for more), suggesting a rate cut is still plausible by mid-year.

Unsurprisingly, the dollar was a major casualty of yesterday's remarks, finally breaking below its November trough in trade-weighted terms. A sharp increase in currency volatility would be unwelcome against a background of continuing turbulence in other financial markets. Greater policy co-ordination would serve both the Fed's and the ECB's interests.

US home sales – adding together new homes and pending sales of existing units – plunged by 26% between December 2006 and August 2007. In posts in October and December I suggested activity was bottoming, in which case stock prices of US homebuilders should start to recover.

Combined sales slipped a further 2% between August and December and probably weakened again in January (new sales were down another 3%). Leading indicators have improved, however. Reflecting lower prices and mortgage rates, and possibly also recent government action aimed at boosting the supply of "jumbo" loans, the home-buying conditions index of the University of Michigan consumer survey strengthened in early February – see first chart. According to the February NAHB homebuilders survey, "traffic of prospective buyers" has risen to its best level for seven months.

Inventories of unsold new homes remain very high by historical standards but have fallen by 16% from a peak in July 2006. The decline should accelerate since new construction has fallen well below the level needed to cover the current pace of sales, which may now recover.

The S&P homebuilding group index has rallied 53% from a "double bottom" low traced out between November and January. The recovery is small relative to the prior fall but the technical position looks promising, with the index having broken and then found support on two significant downtrend lines – see second chart. A move back above the early February high would signal the likelihood of further gains.