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Dual Mandate: Labor and Inflation

08/15/2013

Thursday, August 15, presents a strong roster of economic data to give investors further insight into the potential for the FOMC to initiate tapering at its September 17-18 meeting. Two key reports, initial jobless claims and the consumer price index (CPI), provide the most relevant data. Both reports provide evidence that applies directly to the Fed’s dual mandate of reducing unemployment and managing inflation.

Based on the evidence this morning, I continue to expect that the FOMC will announce the start of the tapering process on September 18. I expect the Fed’s monthly asset purchases will be reduced from $75 billion per month to a range of $60 to $65 billion.

As a result, the S&P 500® Index (SPX) is modestly correcting from its recent August 2 all-time high of 1709.67. The yield on the U.S. 10-year Treasury (Figure 1) is also reacting to pro-tapering economic evidence, rising this morning to above 2.80%, its highest level since July 2011. A move toward 3% seems likely over the next few weeks.

Let’s take a closer look at today’s data…

The Labor Department reported this morning its weekly initial jobless claims figures. Once again, continued improvement was evident, providing further evidence to support my expectation for FOMC tapering to begin at its September meeting.

  • Initial jobless claims (Figure 2) for the week ending August 3 fell 15,000 to 320,000, the lowest level since the 316,000 reported on October 5, 2007
  • The 4-week moving average fell to 332,000 from 336,000, also the lowest level since the 312,000 reported on October 5, 2007
  • Continuing claims fell 54,000 to 2.97 million

For the month of July, the consumer price index (CPI) (Figure 3) rose 0.2%, versus June’s CPI which rose 0.5%. This back-to-back improvement in the index toward the FOMC’s inflation target of 2% should alleviate the concerns of some FOMC members that the deflationary conditions of the second quarter would linger into the second half of 2013.

  • Core CPI, excluding food and energy, rose 0.2% in July
  • Headline CPI is now tracking at 2% year-on-year, improving from last month’s 1.8%
  • Core CPI is now tracking at 1.7% year-on-year, an improvement over last month’s 1.6%

Figure 1 U.S. 10-Year Treasury Yield, July 2011 to August 2013
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Source: Bloomberg

Figure 2 U.S. Initial Jobless Claims, October 2007 to August 2013
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Source: Bloomberg

Figure 3 U.S. CPI, August 2007 to August 2013
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Source: Bloomberg

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