Take Aways from US Data Dump

News that weekly initial jobless claims fell to their lowest level in six years, with new cyclical lows in the 4-week moving average, have overwhelmed the other US data reported today. A recent Bloomberg poll found a little more than 2/3 expect the Fed to begin tapering next month. The risk is that many are putting too much emphasis some indications of improvement in the labor market, and not giving sufficient due to the broader economic context, and, just as importantly, the lack of price pressures.
Indeed outside of the weekly jobless claims report the other economic reports were as expected, like the July CPI, or weaker than expected, like the Empire and Philly Fed surveys for August, and industrial output and manufacturing. Capacity utilization rates, a potential source of bottlenecks in industry and price pressures, slipped to its lowest level since last October.
Separately, the TIC data showed that foreign investors sold long-term US assets at a near record pace. The $66.9 bln sold in June is the largest since the record was set in August 2007 at $72.8 bln. Foreign investors have now been net sellers of long-term US assets for five consecutive months, which appears to be the longest selling streak on record. This has partly been mitigated by the purchase of short-term securities.
The August Empire and Philly Fed surveys contain the most recent information. Weakness in the Empire survey was evident in the forward looking new orders, though future expectations continue to rise. The new orders component of the Philly Fed survey was halved (5.3 vs 10.2) and prices paid fell.
The Federal Reserve exited QE1 and Q2 prematurely in the sense that they later approved a QE3 (and this time kept it open ended). While the labor market has improved, the broader economy lacks momentum and inflation, as Bullard noted yesterday, does not appear to be moving back toward the Fed’s target.
The euro and emerging market currencies have borne the brunt of the impact in the foreign exchange market. The euro is posting an outside down day and may be carving out a potential head and shoulders pattern, with the neck line near $1.3170. A break would suggest a $1.30 target. The dollar stalled against the yen near JPY98.70, but is also recording an outside day. Sterling is holding on to small gains and remains near yesterday’s high.
US yields have risen sharply to new cyclical highs, but the 10-year looks to be stabilizing now just below 2.8%. The backing up of US rates has also weighed on global bond markets and is taking a toll on equities. Note that the S&P 500 gapped lower. It is approaching the 38.2% retracement of the rally off the June lows. It is found near 1652. A break of that would target 1635.
This piece is cross-posted from Marc to Market with permission.