Something of a busy data day. Not all of it pleasant, but I suspect that the Fed will attempt to see through that unpleasantness. Start with the surprise jump in initial unemployment claims:
I don't think the jump is out of line with recent volatility, nor does it suggests that the general downtrend is broken. Next we have a disappointing read on housing starts, primarily due to a drop in the volatile multi-family sector:
I would take comfort in the opposite move in building permits, which will show up as future starts:
The regional manufacturing surveys continue to disappoint, with the Philly Fed survey the latest to fall short of expectations. Calculated Risk has more, and notes that the incoming regional surveys suggest the next national ISM report will be weak. Manufacturing looks likely then to continue bouncing along just above the expansion/contraction mark:
One wonders if manufacturing is really slowing, or if this is a diffusion index issue. We can't tell from the index if the expanding firms are growing very quickly or slowly. We do know that they have been keeping their workers busy:
And we also know that while industrial production dipped in April, again there is nothing to suggest it is rolling over:
The CPI release revealed that inflation remains nonexistent. Indeed, core-CPI tracked lower:
This is what I think the Fed would find as the most important indicator of the day. One would think that low inflation should give the Fed pause in any consideration of tapering quantitative easing in the near future. That said, again we seem to have Federal Reserve policymakers who are discounting the low inflation numbers. San Francisco Federal Reserve President John Williams, in a speech today:
I expect that the decline in inflation will prove to be temporary, and that inflation will climb slowly, but stay below the Fed’s 2 percent longer-run target over the next few years.
Even though he believes that inflation will remain low for a few years (!), he still anticipates beginning the tapering process this summer:
...assuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year.
He adds the usual caveat:
Of course, my forecast could be wrong, and we will adjust our purchases as appropriate depending on how the economy performs.
I think the lack of concern about low inflation is important. We also saw this with noted-dove Chicago Federal Reserve President Charles Evans. Low inflation is simply having less of an impact on policymakers than would be expected.
The other reason I pay attention to Williams is that I don't see him gravitating far from Federal Reserve Chairman Ben Bernanke. We will hopefully learn more of Bernanke's intentions this weekend so that I can test that theory (what better day than a Saturday to provide some interesting guidance or foreshadow next week's release of the minutes of the last FOMC meeting?). UPDATE: No, probably won't be a market moving speech.
Bottom Line: I don't see much in today's data that would lead us to believe the economy is on a substantially different path. But one part of that path is low inflation, which should be meaningful to the Federal Reserve. The problem, however, is that as of yet policymakers seem rather apathetic to the low inflation readings. Apparently even lower numbers are needed to capture their attention.
