The Labor Department this morning delivered another wake-up call to the Federal Reserve regarding its still-negative real (inflation-adjusted) Fed funds rate. The buzzer sounded with the release of the weekly report on initial jobless claims, a widely followed number for gauging economic momentum, or lack thereof.
Today, it was all about momentum, however: upward and onward. The consensus forecast for initial jobless claims was 329,000, but the economy offered 296,000 instead. The magnitude of the better-than-expected news on the number of folks filling for jobless claims last week could hardly be more stark relative to recent history. Indeed, last week’s 296,000 is tied with an earlier report issued in February as the lowest weekly number since late-2000.
One weekly gauge of unemployment claims doesn’t say much, of course, although it speaks a little louder coming a day after the higher-than-expected rise in consumer prices for March. What’s more, this morning’s jobless claims number is the third consecutive weekly drop.
Ah, but there’s the ever-present mitigating circumstance, which in this case is reportedly “seasonal adjustment issues” connected with the Easter holiday. Nevertheless, it’s hard to spin today’s jobless claims number as something other than another piece of evidence that the economy’s still expanding.
“The report indicates that the economy continues to grow at a solid pace, but this is contradicted by other data,” Tony Crescenzi, chief bond market strategist at Miller Tabak, explains in MarketWatch.com.
But the stock market wasn’t focused on “other data” today. The S&P 500 took wing, climbing roughly 2% on the day. The bond market was apparently reading from the same script, albeit with a different though hardly unexpected result. The 10-year Treasury Note sold off sharply, elevating the 10-year’s yield up above 4.3% for the first time in more than a week.
Does all of this suggest that the Federal Reserve will hike interest rates again when the Federal Open Market Committee meets again on May 3? Only if you ignore the “other data” that Crescenzi refers to, starting with the release today of the so-called leading economic indicator (LEI), which fell by 0.4% in March, according to the Conference Board.
Of the ten components in the leading indicator, which is said to be a measure of future economic activity, only two were positive contributors last month: the interest rate spread and manufacturers’ new orders for consumer goods and materials.
The decline in the LEI last month represents the biggest stumble in over two years. Signs of things to come? Perhaps, suggests Jason Schenker, the economist following matters domestic for Wachovia, in a research note today. “The decline in the LEI in March resulted in the index going negative year-over-year for the first time since April 2003,” he writes. “Although the index is only down -0.5 percent year-over-year, a protracted period of negative year-over-year rates has historically been associated with recession.”
Nonetheless, Schenker believes the economy is still “solid” and opines that “we are merely moving from recovery into the more moderate growth phase of expansion….”
That’s his story and he’s sticking to it. Indeed, more than a few observers of the economic scene say as much. That growth bias may very well remain intact until the market gets its first peek at first-quarter GDP estimates, which will be released at 8:30 a.m. New York time on April 28. The consensus projection calls for 3.5%, down slightly from 3.8% logged in the fourth quarter.
Yes, Virginia, the quarterly GDP numbers are always woefully lagging snapshots, but that doesn’t mean they can’t be market-moving events when and if they deviate from the best guesses of the dismal scientists.