Inflationary Pressures & No Jobs

We have a range of economic data on the docket today, from jobs and inflation to housing and leading indicators. And Europe is again in the news for the all the wrong reasons. With Europe’s leaders unable to come up with anything other than band-aid solutions, we better get used to Europe as a recurring source of headline risk.

Europe’s problems have the potential to pose a systemic challenge to the U.S. economy. But I don’t think we will reach that stage. The common currency project is way too important to the German and French economies. Sooner or later, they will have to get behind proposals to for further fiscal integration in the Euro Zone. Short of some measure of fiscal federlization that will make Germany in effect back-stop the entire debt issue, it is inconceivable for the current fears to go away.

The debt problem on this side of the Atlantic is no less dire. But we know that a long-term solution to the U.S.’s problem lies in robust economic growth. But the near-term picture remains uncertain and at best provides for sub-par growth. This morning’s data provides for more of the same, both on the CPI as well Jobless Claims fronts.

The CPI number was a tad hotter than expected on the headline basis, but the ‘core’ number was about inline with expectations. Given the broader decelerating trend in the economy and the recent pullback in commodity prices, inflation will likely have less staying power than would otherwise be the case. However, persistent ‘hot’ CPI readings will make it difficult for the Fed to contemplate further quantitative easing even if it is inclined to go that route.

I am not terribly concerned about the CPI number, but I must concede that the Jobless Claims report turned out to be quite disappointing. Weekly Jobless Claims increased by a greater than expected 9 thousand for the week to 408 thousand. The prior-week’s tally was revised upwards to 399 thousand. The relatively more stable 4-week average dropped by about 4 thousand last week to almost 403 thousand.

It is clearly disappointing to see the weekly claims number jump back above the 400 thousand level where it has remained consistently since April, except for one week. The only saving grace here, and I am really trying hard here, is for the prior-week’s number to stay below the 400 thousand level despite the upward revision. In absolute numbers, the extent of the ‘miss’ is not by much, but the change in direction is worrying.

The overall tone of this morning’s earnings reports is also on the negative side. We got weaker than expected results at Sears Holdings (SHLD) as the retailer continued to struggle in its ongoing efforts to align its business model to the tough retail environment. J M Smucker (SJM) came out with better than expected recurring earnings, but fell short of revenue expectations. The maker of Folger’s coffee and Jif peanut butter continued facing margin pressures on account of high green coffee prices.

In a key report after the close today, Hewlett-Packard’s (HPQ) results will give us a better handle on consumer sales after Dell’s (DELL) sub-par numbers.

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