INDICATOR: June Import and Export Prices/Weekly Jobless Claims
KEY DATA: Imports: -0.2%; Nonfuel: -0.3%: Exports: -0.1%; Farm: +0.6%/Claims: 360,000 (up 16,000)
IN A NUTSHELL: "Low inflation and higher jobless claims are not the combination that would argue for the Fed to start ending their aggressive policy anytime soon."
WHAT IT MEANS: The Fed has two targets: inflation running about 2% and the unemployment rate getting back to at least 6.5% so it is nice when we get data that tell us about inflation and the labor market. Well, the numbers released today were not the greatest. On the inflation front, import costs declined across the board. Fuel prices increased, but minimally. Otherwise, it was hard to find anything other than a few textile products that posted a rise. That is occurring partially because of the strengthening dollar, which is making imports cheaper. On the export side, farmers are doing well but most other industries had to settle for price declines. With imported product prices falling, it is hard to see how domestic firms can raise their prices so the pressures are for inflation to remain tame. That should be the situation for a while as labor costs are not likely to accelerate. Weekly claims jumped but the week-to-week movement needs to be dismissed. More importantly, the four-week moving average remains in the 350,000 range which points to only slow downward movements in the unemployment rate.
MARKETS AND FED POLICY IMPLICATIONS: If the Fed is to start withdrawing its support of the bond market it really needs to have good reason to do so and right now, there is no reason to do so. Inflation is below target and the unemployment rate is well above it with no reason to think either situation will change soon. Worse, the awful performance of Mr. Bernanke and his fellow gang of clueless monetary policy makers in trying to communicate the incommunicable only led to a sharp rise in interest rates. Housing has been a leading light in this recovery and the decision of the FOMC to try to say that QE will start to end this year succeeded in putting that at risk. Mortgage rates at 4.5% are not high but what we need is low rates at the same time that people can actually take advantage of them. With home prices rising, more people have equity to make a move and with payrolls increasing more people have jobs so the days of most people being on the outside looking in is starting to end. Former Fed Chair William McChesney Martin, Jr. was quoted as saying that "the job of the Fed was to take the punch bowl away just as the party gets going". Well, the invitations to the soiree just went out and the Fed has already started to control the ladle. Dumb. That is why Mr. Bernanke tried to walk back his comments. He has made it clear that the Fed will not withdraw its support until the economic conditions warrant it. That still could mean that quantitative easing will begin to be unwound by the end of the year. But if the higher rates slow housing and keep the unemployment rate from falling very much, the Fed could and probably should wait until next year. Did the Fed box itself in? Not necessarily. Mr. Bernanke is trying to move the discussion away form QE and toward raising the funds rate. If he can do that, he will take some pressure off the Fed. The reality is that rates at all maturities matter, so the Fed goofed. We will see if that mistake was large or small.