Today's data was supportive of the Fed scaling back its asset purchase program sooner than later - although it is important to clarify that "sooner" does not mean next week, but September. Later is December. Data dependent, of course. But the data is not yet taking the kind of downward turn needed to turn talk away from tapering.
Retail sales rose 0.6% in May, slightly ahead of expectations of a 0.5% gain. Excluding autos and gas, the general upward trend of recent months is steady:
That said, the pace of growth isn't exactly something to get excited about:
At best, year-over-year growth is just pulling back into the range seen for most of 2012. We are getting spending growth, just not as much as would normally be seen in an expansion. That lack of growth, however, was evident before the tapering talk emerged, suggesting that the Fed does not see the current pace of activity as an impediment to tapering. Talk about diminished expectations....
Somewhat more optimistic was the drop in initial unemployment claims:
Volatile data, to be sure, but I still don't see reason to believe the downward trend is broken. We are heading into a range generally consistent with solid job growth, a key focus of monetary policymakers as they assess the pace of quantitative easing.
Separately, Zero Hedge is quoting economist David Rosenberg:
From what I hear, Ben Bernanke convinced the FOMC in December that in order to get ahead of a potential 'fiscal cliff' in December, it was a matter of having to 'shoot first and ask questions later'. In other words, take a pre-emptive strike in December against the prospect of falling off the proverbial cliff and into recession in the opening months of 2013. But what happened next was a fiscal deal that was reached in early January and the economy faced a hill, not a cliff. The economy still faces near-term sequestering hurdles, but the reality is that a bold policy move aimed at thwarting off recession is now being reconsidered. Bernanke apparently told the hawks on the FOMC that if the economy was not in contraction mode by now, the 'tapering off' talk would ensue — and that is exactly what has happened.
An interesting anecdote, and, if true, suggests that Federal Reserve Chairman Ben Bernanke is not quite the dove many believe him to be. Moreover, it would be consistent with my belief that Bernanke uses the next press conference to clear the way for tapering.
Finally, Edward Harrison, in his review of global market volatility (behind paywall), worries that the worst is still ahead of us with regards to fiscal contraction:
In North America, the talk is of tapering and the markets are in a tissy. It shows you that QE is really about risk-on risk-off and the markets are moving to risk off because they don’t believe in the Bernanke put anymore. In the real economy, it’s stall speed and I expect it to stay that way until Q4, when the next year of fiscal cuts come. The Republicans are now ready to make serious cuts to defense. Someone I know who does budgeting at Defense told me no one made any real cuts this year because they had budget headroom. The real cuts are coming in FY 2014. I think FY 2014 is going to be ugly.
The Fed is thinking the impact of fiscal contraction will fade as 2013 progresses. Harrison is suggesting this is wishful thinking.
Bottom Line: Today's data appears consistent with Fed expectations that they can begin tapering asset purchases this year. Still a horse race between September and December, although I think the Fed is aiming for the earlier date if data allows.
