US Inflation and Jobless Claims Data Boost Stocks and US Dollar

Stocks rallied while Treasuries and swap rates sold off across the curve as investors speculated about the impact of recent data on central bank monetary policy.  Today’s US data was quietly better than expected, but yesterday’s disappointing readings on consumer spending and inflation, and September’s weak payrolls report, all but ensured the Fed will remain on hold through at least October.  The Wall Street Journal’s Hilsenrath put out a piece last night that spoke to the weaker data weighing on the Fed’s thinking.  The article also mentioned the two Fed Governors, Brainard and Tarullo, who signaled unease this week about the economic outlook and the framework that Yellen laid out for why rates should rise before year end.  The comments reflect internal divisions within the central bank and contradict certain regional Fed presidents who have more outspokenly stated the case for a rate hike this year.

Today’s data, headlined by the stronger-than-expected inflation report, boosted the dollar, and kept alive the possibility of a rate hike in 2015 (December, if at all).  Headline consumer prices declined 0.2% in September, but the core number increased 0.211%, increasing the YoY rate to 1.9%.  The 4.7% monthly decline in energy prices was responsible for the bulk of the headline weakness, while food prices and core services exceeded expectations.  Separate data showed applications for jobless claims benefits unexpectedly dropped 7,000 to 255,000, the lowest since November 1973.  The less volatile four-week average fell to 265,000, the lowest since December 1973.  The weak September payrolls report is likely to stick in the minds of the more dovish Fed members, but the claims numbers are consistent with a fairly tight labor market that continues to improve.

Aside from the data, markets will continue to watch corporate earnings, headlines, and a variety of Fed speakers including Bullard, Dudley, and Mester.