Data from the US today was supportive in that jobless claims fell by more than expected and 2nd quarter GDP was revised higher in its final version than expected.

The data helped S&P500 futures to climb to an intra-day high, along with oil. That means it should be taken as a positive for risk sentiment, which might actually mean a bit of a soft tone for the USD, but in general we don't see USD crosses affected too much from the releases. The USD/JPY did have a bit of a pop as positive US data does help the USD in this battle of safe haven currencies.

Jobless Claims Move Below 400K

The last five weeks have seen jobless claims moving in the wrong direction, as we've moved further away from the 400K level. The 400K level is usually consistent with 120K+ jobs via the monthly non-farm payroll report and is a key level for the US labor market. There is also indication from the Labor Department that part of the sharp drop was due to seasonal adjustment factors.

width=449

GDP for 2nd Quarter Grows 1.3% Annualized Rate, Not 1.0% as Reported in Preliminary Reading

US GDP was revised higher in its final release for the 2nd quarter, up to 1.3% vs. the 1.0% seen in the preliminary release. This was slightly better than expectations of a revision to 1.2%, and the upward revision was largely a result of stronger consumer spending, exports, and business investment.

width=591

Pending Home Sales Dip 1.2%

Pending home sales fell less than expected in August, a sign that housing will continue to struggle, but that the decline as a result of the turmoil in financial markets that hit consumer confidence during the month resulted in a smaller drop than expected. We can mark this as another positive for the US in that we beat expectations, but the raw figure, a negative print, continues to point to soft sales.

Takeaway #1. Claims Falling Below 400K a Positive Sign , But Let's See A Trend First Before Celebrating

 

 

<a rel='nofollow' href='http://x.oanda.com/delivery/ck.php?n=a135424c&cb={random}' target='_blank'><img src='http://x.oanda.com/delivery/avw.php?zoneid=5551&cb={random}&n=a135424c' border='0' alt='' /></a>

We are going to take this move below the 400 K level as a positive signs for the US labor market, but with this index is important to look at the trend and not just one week of data. Therefore while we did have a small sense of optimism, we have to look forward to next week's report and the data throughout October. Now, next we do get the non-farm payroll report for September and therefore we will get a much clearer understanding of the jobs picture from this month, but even after that, we want to see if claims can manage to stay below this 400K.

Takeaway #2. Gauging Consumer Spending

The revised figures show that personal consumption grew 0.7% in the second quarter versus the previous estimate of 0.4%. Unfortunately this data is dated and therefore while we do see consumers spending a bit more than was previously estimated, it's not the best reading for us as we try to assess what's happening currently.

Tomorrow we get a look at personal spending for the month of August, which will give us a clearer indication of what is happening with personal consumption in the middle of the third quarter.

Takeaway #3. Inflation Climbed Higher in 2Q, But Will That Reverse in 2nd Half

From the GDP release, we see that the Fed's preferred gauge for inflation, the price index for personal consumption expenditures excluding volatile food and energy items (core PCE price index), rose at an annual rate of 2.3%, compared with an earlier estimate of 2.2%. That's the highest figure in three years and outside the central bank's comfort zone of just under 2.0%.

While this inflation data suggests that the Fed's hawks are right to dissent against further accommodative measures, the weakness in the economy, and in demand, recently suggest that inflation should ease in the second half of the year.

Fed Chairman Bernanke, yesterday, drove that theme of falling inflation yesterday in comments after a speech. His comments were prompted in response to a question about a recent decline in market-based inflation expectations, as the gap between yields on 10-year treasury notes and inflation protected counterparts fell to 1.7% last week, the lowest figure since September 2010. His response was if inflation falls too low or inflation expectations fall too low, though be something we have to respond to because we do not want deflation.

Markets expectation for inflation of course leads what is happening with inflation currently, which is that the core annual CPI has been steadily climbing over the last eight months.

width=448

This rise in current inflation flies in the face of inflation expectations, so if we start to see this CPI dip in the coming months, that could be the trigger needed for the Fed to consider doing more to accommodate monetary policy.

Nick Nasad
Chief Market Analyst
FXTimes